China Has Begun Slashing Commodity Production On Overcapacity Fears

The Business Insider ^ | 6-4-2010 | Vincent Fernando, CFA

[blam]

China Has Begun Slashing Commodity Production On Overcapacity Fears

Vincent Fernando, CFA
Jun. 4, 2010, 10:19 AM

China is bringing back production restrictions for select commodities, after removing such restrictions during the recent global crisis.

The Ministry of Industry and Information Technology (MITI) announced capacity closures this week, and more will come via the National Development and Reform Commission, says Citi's Alan Heap.

Citi:

Coal – Further Closures — MIIT announced a target to cut 21Mt of coking coal capacity by 3Q 2010, following the 82Mt closed in 2009. Of this only 5Mt is in Shanxi, where most of the closures have occurred so far.

Aluminium Capacity Closures — The target announced by MITT this week of 340Kt, takes the total to 1.7Mt by 2011. Older plants are targeted which use Soderberg technology and low Amp (<100kA) cells.

Note that the coking coal cuts are of particular interest for dry bulk shipping investors such as those in Dryships (DRYS) or Eagle Bulk (EGLE) given that less domestic production means that more will have to be imported via seaborne routes, which is positive.

Still, to what extent these policies are actually implemented remains to be seen:

Provinces on Board? — Critical to the success of these plans is whether or not provincial governments tow the line. Notably in the case of coal closures, Shanxi has announced targets 40% above the central government’s, and in the case of aluminium Henan province has increased electricity tariffs by USc0.4/kWhr above the central government’s.

[snip]

[ChinaThreat]

Just as i expected, commodities are going to get squeezed. So while the value of your house drops precipitiously, the cost of living is going to rise. Its a deflation/inflation scenario that will end in hyper-inflation.

[quintr]

oh boy, here it comes.