The Steel Sector and Why Supply Side Measures Haven't Worked
After 55 months in negative territory,the producer price index,or PPI - which measures prices at the factory gate -- finally showed a year-on-year rise in September. That was hailed as an indication that China's economy was turning the corner. Coupled with an improvement in the purchasing managers' index,or PMI - a measure of business activity -- the conclusion has been that perhaps it was time to discard the prevailing pessimism about overcapacity in key industrial sectors. However,a careful observation of the industries with excess production capacity shows that there are many factors at work. At the end of last year,the prices of coal,iron and steel were all at record lows,which made it difficult for enterprises in the sector to generate profits. This year,especially in recent months,prices for these same commodities have shot up. And in some sectors high prices have been the result of government efforts to cut production capacity.
This is partly because government policies have been inconsistent. At times,authorities have slapped limits on working hours while at others they have curbed prices or removed all restrictions on supplies of materials. Such contradictory policy directives have ignored normal pricing factors. They have also confused entrepreneurs and distorted market expectations. More importantly,these measures have undermined confidence in the ability of the market to make a sustained recovery. What forces are the real cause of this strange situation and how do we address this problem?
The 'Visible Hand' and the 'Invisible Hand'
A careful observation of the improvement in the PPI and the PMI,however,reveals that the upturns coincided with the rebound in the prices of iron,steel and coal. A look at the sub-indexes of the PPI shows that the PPI rebound came mainly from the production side and that was largely from heavy industry rather than light industry. Coal,iron and steel are all important upstream and-midstream products. They drove the rise of the PPI and in turn the PMI.
