Margaret Thatcher was laid to rest this week but the polarising debate about her legacy looks likely to live on for years.
Much of the disagreement reflects rival responses as to how she sought to reshape Britain’s industrial heritage. Although Thatcher is best remembered in this regard for her struggle with the miners in 1984/5, her first confrontation with the unions at a national level actually came in 1980 with the steel sector.
Targeting an industry led by the British Steel Corporation (a state giant which had earned itself a place in the Guinness Book of Records that year for inefficiency, says the Daily Telegraph, after requiring £1 billion of taxpayer support to produce a turnover of just under £3 billion), her government then oversaw a drastic retrenchment in which thousands of jobs were lost at underperforming plants across the country.
Until Thatcher took office, many of those plants were maintained for political rather than economic reasons, something that strikes a chord in discussions of consolidation in the Chinese steel sector today.
Talk of retrenchment has featured frequently in WiC, from an early mention of the central government’s unease at overcapacity (see WiC29), through reports hinting that reform was underway (see WiC70 or 74), to more recent recognition that progress has been slow at best (see WiC166).
In a similar spirit, the early part of this year saw claims of redoubled efforts by a group of government agencies under the leadership of the Ministry of Industry and Information Technology (MIIT), with the issue of another round of guidance on consolidation in nine key sectors.
True to form, the steel industry was included as a candidate, with stipulations that 60% of output should be concentrated among the top 10 corporations by 2015 (they make up about 45% of production currently, says the Hong Kong Economic Journal).
Additionally, up to five major corporations are expected to achieve sufficient scale to make more of an international impact (bulking up will help in getting financing for acquisitions and winning more overseas business, the Journal says), while six to seven other steel producers are required to be large enough to have a regional presence at home.
But meeting those objectives will require that other steel firms are merged, absorbed or simply allowed to go bust. And the problem, say industry onlookers like Daniel Rosen at the Peterson Institute, is that this just isn’t going to happen. Despite all the talk about consolidation, the number of steel enterprises actually doubled between 2002 and 2006. Nor has there been much sign of retrenchment since – in fact, the growth of ferrous metals firms in general has been relentless: from 7,000 in 2005 to about 11,000 today.
Could things change with the latest missive from MIIT? Rosen’s view is that they won’t and that any call for reduced numbers will struggle for traction while provincial officials rely on tax revenues and other payments from state-related firms to help finance local healthcare and education.
“If you consolidate the steel companies in 10 Sichuan counties, you leave nine of them bankrupt and benighted,” Rosen warns by way of provincial example. “And that, in a nutshell, is why this [consolidation] is so hard. To quell local resistance Beijing has to fix the mismatch between revenue and local responsibilities – otherwise this is all just prattle.”
Prattle perhaps, but MIIT is still ratcheting up the verbal pressure, publishing a list this month of operators that meet national standards in areas like product quality, environmental protection, energy consumption and scale of production. Acknowledging that previous measures have failed “to stop the indiscriminate development of the steel sector”, Miao Zhimin, a deputy director at MIIT, said the ministry will now focus on supporting the companies mentioned as part of the wider restructuring effort.
Consisting of 30 state-owned enterprises like Baosteel and Angang Steel, plus 15 private firms, the group had combined output last year of 300 million tonnes, or 41% of the national total.
By contrast, companies who don’t feature on the list face a squeeze via higher electricity prices and stricter administrative measures, Miao warns.
Sceptics can be forgiven for thinking that this latest bout of policy prodding is unlikely to be particularly forceful. “We’ve seen that industry overcapacity has been difficult to solve by relying on government-led mergers and reorganisation, and that only market pressure will lead to substantive integration,” Hu Yanping, a steel analyst told Beijing Business News.
So could a dose of Thatcherite market forces really result in what policymakers have failed to achieve: a permanent rationalisation of an overcrowded industry?
Steelmakers are currently struggling with a market of almost ‘perfect competition’, says HSBC’s Asia-Pacific head of metals and mining Simon Francis, who cites excess capacity, weak supply-side discipline and competition based largely on price as factors in a bleak outlook for the sector. Yet despite the awful conditions, few firms are actually cutting production because they fear losing market share to competitors, Francis also warns.
Perhaps these straitened circumstances will create blow-up conditions, in which the weakest members of the industry finally go to the wall. But the problem in allowing the market to do its worst is that state champions might get caught in the crossfire. For example, a shakeout of the worst performers would include a giant in the sector – and a leading candidate for the elite grouping favoured by the planners at MIIT. Its financials are so atrocious it’s on a ‘special treatment’ watch list drawn up by the Shenzhen stock market.
The company is Angang Steel, the largest supplier to the domestic railway industry, as well as China’s second largest steel producer with a capacity of 21 million tonnes. Despite its status, Angang reported Rmb4.16 billion ($673 million) in losses last year, following a Rmb2.1 billion loss the year before. That means that its stock now has an embarrassing new label as ST Angang on the Shenzhen bourse as a warning to investors (ST stands for “Special Treatment”). Should it announce another loss this year, Angang could even face the humiliation of a delisting.
Angang’s stock price is doing better this year on news that a cost-cutting programme should bring it back into profit in the first quarter. But this fails to mask a more fundamental failing at similar state giants, says Shirley Yam in the South China Morning Post. She warns that market signals matter less than political ones for the leading SOEs, picking state shipping giant China Cosco as a prime example. It did even worse than Angang in each of the last two years, losing Rmb9.5 billion and Rmb10.6 billion respectively, making it the poorest performing state enterprise of all (see WiC182). But its boss Wei Jiafu seems unperturbed, Yam says, because he knows his first task is to show loyalty to his political bosses rather than to shareholders in general.
Wei, who has run into criticism from some of his shareholders, seemed to be making a similar point about this relationship, by mentioning that he had travelled personally with China’s new president Xi Jinping to a BRICS summit in South Africa last month.
“If I am as bad as suggested by some people on the internet, could I have accompanied the state leader to the summit?” he asked.
This close bond between business heads and political bosses mean that much of the debate about state enterprise reform is empty talk, Yam suggests. And WiC’s guess is that what happens at a national level is reflected in similar ties between hundreds of smaller steel mills and their political backers around the country. In principle the market will drive change if left to do so, as many nostalgic Thatcherites will be recalling this week. But in China the political realities look like complicating the process. Or as Wei summed it up rather succinctly: “As long as China Cosco is fully understood by Party central and the State Council, it’s enough for me.”
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.