China’s Excess-Capacity Nightmare

SHANGHAI – Back in 1958, the year of China’s ill-fated “Great Leap Forward,” Chairman Mao had big plans for the steel industry. While production had been just over five million tons in 1957, he expected the country to catch up with or even surpass the United States by 1962, producing 80-100 million tons per year, and to reach 700 million tons per year by the mid-1970’s, making China the undisputed world leader. All this was to be accomplished using small “backyard steel furnaces” operated by ordinary people with no particular technical expertise.

Today, Mao’s dream of catching up with the rest of the world has been realized, albeit a bit behind schedule, not only in steel making, where annual capacity has reached 660 million tons, but in many other sectors as well. In 2008, China ranked first in steel (about half of world production), cement (also about half), aluminum (about 40%), and glass (31%), to take just a few examples. The country topped the US in auto production in 2009, and remains second only to South Korea in shipbuilding, with 36% of global capacity.

For Beijing’s central planners, however, the size of China’s industrial base has become a cause for alarm rather than celebration. In a document approved by the State Council on September 26, the National Development and Reform Commission (NDRC) warned of serious excess capacity in a wide variety of sectors. (The State Council, which includes the premier, vice premiers, and heads of ministries and commissions, is China’s highest executive authority.)

Based on the NDRC’s figures, 2008 capacity utilization rates were just 76% for steel, 75% for cement, 73% for aluminum, 88% for flat glass, 40% for methanol, and 20% for poly-crystalline silicon (a key raw material for solar cells). The current project pipeline also implies less than 50% utilization for wind-power equipment manufacturers in 2010.