Macroeconomics
On the eve of the financial crisis, Chinese steel companies were highly profitable. This attracted huge investment
flows year had and expansion
of capacity. Moreover, the form of China’s massive stimulus program underpinned even more investment. Last
a surplus of 160 mln tones. Output is near record levels, but utilization is near 80%. Around half of the output is going into inventory.
The cement in d u st r y followed a similar pattern. Despite the vast infrastructure projects under way, China’s c em en t industry, which accounts for almost 2/3 of
the global
industry, is operating at less than 70% capacity.
capacity as well, such as cell phones and autos.
The Chinese government has
officially identified 9 key sectors that are suffering from over investment (excess capacity): Steel, aluminum,
FX
in 2012 and the top ten account for less than 50%.
This is an important point. These industries that suffer from excess capacity (and therefore falling prices) tend to be fragments. Industry concentration is one way to reduce and
regulate excess capacity.
WORLD PRODUCTION
C om m an d economies such as China are not the only ones suffering from over- investment and excess capacity. Consider the European auto market.
Over-capacity is often understood in
the context of China. There is strong competition between local officials to fund the next boom.
There have been press reports documenting excess production in numerous other sectors, including glass, paper, solar panels and other clean technology, and shipbuilding. There are a wide range of consumer durable goods plagued by excess
rare earths, cement, electronics, pharmaceuticals, autos, shipbuilding, and industrial agriculture. Over time the government will help foster the rationalization of these industries, which means an increased consolidation and the shuttering of inefficient capacity. There were an estimated 2,700 steel mills in China
the capacity to produce
more than 19 mln vehicles
a a
It has little year.
Sales in 2012 were 13.1 mln and this year they are projected to
fall to 12 mln. In 2008, 16 mln cars were bought in the EU.
Given the contraction in the euro area and UK, one might want to dismiss the excess capacity as cyclical in nature.
However,
this is to miss three of important points. First, even in the best of
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