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Tough Task Ahead for China's Coal and Steel Industries 

Grassroots Research 

 

2/1/2017 

When Grassroots surveyed coal and steel manufacturers in China about recent capacity reduction orders, we learned many didn't meet their targets.  And now with the potential for protectionism from the Trump administration, production looks more uncertain.

Suffering from supply-side reforms

In recent years, China's coal and steel industries have been suffering from the government's supply-side reform policies. To understand how these reforms—particularly capacity reductions—affected profitability, GrassrootsSM Research talked to a number of managers at China's state-owned and private coal and steel manufacturers. Among our key findings:

  • More than half our sources said they did not meet their active production capacity targets for 2016, mainly due to a worse-than-anticipated drop in steel and coal prices.
  • Many companies maintained active production to avoid bankruptcy. Coal manufacturers made a slight net profit while steel manufacturers were unprofitable in general.
  • All said the target for capacity reform in 2016 for their industry was too aggressive and unlikely to be met.

Over half our sources did not meet production capacity targets for 2016, and profitability has suffered
"The findings indicate that on-the-ground staff were quite skeptical about meeting the de-capacity targets," said Research Analyst Rose Lu. "We were also interested to learn that satisfactory profitability has not yet returned, and that steel is faring worse than coal."

Slowdowns projected for 2017

Looking ahead to 2017, coal manufacturer sources expect 16%
More changes should help big players in excess-capacity sectors return to moderate profitability
permanent and 10% temporary shutdowns on average, while steel manufacturers expect permanent and temporary shutdowns of 8% each. In view of these expected changes, Senior Portfolio Manager Christina Chung added, "Overall, we believe that supply discipline and gradual de-capacity should improve the supply/demand imbalance and potentially help big players in these excess-capacity sectors return to moderate profitability. However, protectionism from the Trump administration would hurt the demand outlook. Still, we believe that China's government will support economic growth and keep demand stable by increasing infrastructure investment and accelerating the 'One Belt, One Road' strategy."



The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

GrassrootsSM Research is a division of Allianz Global Investors that commissions investigative market research for asset-management professionals. Research data used to generate GrassrootsSM Research reports are received from reporters and Field Force investigators, who work as independent, third-party contractors, as well as external research panel providers—all of whom supply research that may be paid for by commissions generated by trades executed on behalf of clients. We believe these sources of information to be reliable and are providing the information in good faith, but in no way warrant the accuracy or completeness of the information. We have no obligation to update, modify or amend this document or to otherwise notify you in the event that any matter set forth in this document changes or subsequently becomes inaccurate. In addition, information may be available that is not reflected at this time. We accept no liability whatsoever for any direct or consequential loss or damage arising from your use of the information contained in this document. We and our affiliates, officers, employees or clients may effect or have effected transactions for our or their own accounts in the securities mentioned here or in any related investments. The information provided in this document is provided for informational purposes only and shall not be considered investment advice. Any reference to a particular company shall not be considered an offer to sell, the solicitation of an offer to buy or a recommendation to buy, sell, or hold any security issued by such company. No part of this material may be i) copied, photocopied, or duplicated in any form, by any means, or ii) redistributed without prior written consent.


Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, us.allianzgi.com, 1-800-926-4456.

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