Wednesday, June 3, 2015

China over-capacity fact of the day

From an excellent article in the WSJ, on how the massive excess capacity in China is exacerbating global disinflation and economic weakness,
Milk producers in New Zealand, coal miners in Australia and sugar growers in Brazil have been forced to cut their prices after finding they had overestimated commodity demand from China. At the same time, Chinese manufacturers, stung by their country's economic slowdown and excess capacity, are flooding export markets with finished goods such as tires, steel and solar panels.
Steel is the stand-out example of this over-capacity,
With China’s slumping construction industry requiring less steel than had been expected, the country has become a massive global exporter of the metal, weighing on global prices. Last year, China exported 94 million metric tons of steel, more than the total output of the U.S., India and South Korea, the world’s third, fourth and fifth largest producers. UBS analysts estimate the world has excess steel-production capacity of 553 million metric tons a year, much of it in China. That is enough to build more than 10,000 modern aircraft carriers a year, or the Eiffel Tower 75,000 times annually. The price of a common steel product called hot-rolled coil has dropped by 44% since March 2012... 
The pace and scale of expansion in all these sectors was staggering and carried seeds of their own demise. Consider the example of tire industry with its linkages,
Between 2000 and 2013, China’s tire production soared threefold to about 800 million tires a year as the country grew into the world’s biggest auto market... Producers exported many of those tires, occasionally drawing complaints from tire industries in the U.S., Brazil, Turkey, India, Colombia and Egypt that China was dumping its excess supplies on their markets. All six nations imposed tariffs on Chinese tires... the more than 300 tire makers in China operate at 70% of capacity, far below the 85% that economists say is needed to generate profits. Chinese tire exports increased tenfold between 2000 and 2013.
Guangrao, a county in eastern China, is home to about 200 tire factories in an area dubbed Rubber Valley... Rubber Valley’s problems have rippled out to other countries, including ones where planters produce the raw material for tires. Rubber trees take about seven years to mature. Planters had to decide in 2007—when China’s gross domestic product expanded by 14.2%—how many trees to plant to meet demand in 2014. When it was time to harvest, the Chinese economic growth rate had fallen by about half... the price of the milky white sap, called latex, that is processed into rubber is down 60% from its high four years ago.

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