Abstract On June 20th, foreign media reported that Song Tingyuan was one of the largest steel mills in the boring industrial city of Tangshan. At this point it was in a production stoppage. Workers in the factory – who have not received wages for months and are worried about their future – have been laid off. The annual output of 5 million tons...
On June 20th, foreign media reported that Songting was one of the largest steel mills in the boring industrial city of Tangshan. At this point it was in a production stoppage. Workers in the factory – who have not received wages for months and are worried about their future – have been laid off. The steel mill with an annual output of 5 million tons has not moved. After three months, silence was broken. Song Ting is back to life - this is bad news for China and the global economy. According to the US "New York Times" reported on June 12, the situation of this factory shows that Beijing faces the challenge of adjusting the slowing Chinese economy. China urgently needs to eliminate unnecessary and unprofitable production capacity in many industries in order to shift the economy to more profitable areas.
The central government has repeatedly promised to deal with this problem. In the steel industry alone, the Chinese leadership announced this year that it plans to cut up to 150 million tons of steel capacity by 2020 – a larger scale than the entire steel industry in Japan.
However, as the situation of Song Ting shows, even the most problematic factory is difficult to turn off. It is estimated that China’s permanently closed steel mills last year were less than 2% of overall steel production capacity. In the same period, about one-third of the production capacity was idle.
According to data from the local government website, Songting employs about 6,000 people and is one of the largest private steel mills in the city. As new homes and infrastructure construction stagnate and steel prices plummeted, Songting encountered difficulties with the entire industry. Workers said that since the beginning of 2015, they have been unable to get regular salaries. During part of the year, part of the plant’s equipment was discontinued and management began to lay off staff.
On the morning of November 14 last year, the workers worked in their respective positions as usual, but they heard the manager inform them that the factory would be closed indefinitely. A report by HSBC in December showed that the loss-making steel mill was unable to pay a fee to the local power supply bureau and was forced to suspend production.
Workers who have worked here have revealed that some employees are starting to ask for a salary. At that time, Song Ting owed them about six months' salary. However, from the end of February, some workers began to receive calls from former managers and asked them to go back to work. They learned that the factory partially resumed production.
The report said that the reasons are not clear. Industry experts say other bosses have restarted the factory to make a profit. The recent jump in steel prices – generally attributed to China’s new round of credit boom – and the improvement in the construction industry have also helped the factory owner’s decision.
Xu Xiangchun, director of information at the China Research Corporation's "My Steel Network", said that keeping a job is also a major consideration. “Employment is the biggest problem for governments and businesses,†he said. “So these companies have taken various measures to revitalize capital and provide workers with job opportunities.â€
The report said that the troubles in this industry are far from over. According to Fitch Ratings, a bond rating agency, the steel industry's debt size may be as much as $600 billion. Such a large debt burden, coupled with low product prices and weak demand, has caused the entire industry to lose money. China Iron and Steel Association said that its members lost a total of 64.5 billion yuan last year. In 2014, these companies received a total of 22.6 billion yuan in profits.
“Even without the government’s push, the market environment will eliminate more capacity,†said Rachel Zhang, Morgan Stanley’s steel industry analyst. "This is only a matter of time."
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