What’s coming beyond China’s Winter shutdowns?

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Via UBS’s Wang Tao:

Notable progress achieved in excess capacity reduction
China officially cut 65 million and 290 million tons of steel and coal capacities in 2016, and will likely exceed its official targets again this year, of 50 million and 150 million tons respectively. Aside from capacity reductions, coal production restrictions, illegal steel capacity closures and tighter environmental rules have all helped to restrain supply too. China’s overall industrial capacity utilization rate has risen by 4ppt since early 2016 to 76.8% in Q3 2017. Tighter supply controls and a demand recovery thus both helped China’s commodity and material sectors to stage a big 2017 price & profit turnaround.

Air quality campaign will weaken GDP growth in Q4 2017 and Q1 2018
While the government continues to cut excess capacity as planned, we estimate that the 2+26 cities air quality campaign will potentially cut 10% of China’s steel, 13% of cement, and 6% of aluminium production during the peak heating season (Nov 15 – Mar 15). The net impact on GDP may be somewhat less due to expected slower demand growth, higher production in un-restricted areas, and a later release of “pent-up demand” after mid-March. We see a net drag of around 0.1ppt on Q4/2017’s GDP growth and 0.2ppt on Q1/2018’s. Around 2 million workers in related sectors may be affected at least temporarily. Upstream prices may stay elevated through winter but likely soften after Q1.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.