Macquarie's commodities analysts have been to China and they've come back
... gloomy.
The bank has previously highlighted the steel industry as a poster child for commodities woes, with particular emphasis
on overcapacity in China. In the face of slumping metals prices,
the pressure is on miners and producers to cut supply. Unfortunately for
global commodities prices, a chunk of the world's metals producers
seem reluctant to do so—even in the face of losses.
The Macquarie chart below shows steel mill profitability in the red.
Source: Macquarie
Why would Chinese steel mills maintain production in the face of low or
nonexistent profitability?
Macquarie has a few thoughts.
For a start, analysts led by Colin Hamilton point out that steel mills
have been pulling some levers to offset losses. Those levers include encouraging
traders to prepay for purchases and, putting it diplomatically, attempted
"VAT evasion among small and private mills." Such measures have mitigated
the effect of lower steel prices, Macquarie says.
Other dynamics are at play, too.
"Our speakers generally thought any capacity closure is extremely
difficult and that few closures are actually urgent at the moment
for a number of reasons. One of them is that we have constantly heard that local governments
simply wouldn’t allow steel mills to be closed down for the sake of local
employment and fiscal income. ... It was also emphasized that
mills are concerned about losing market shares and having to spend fresh
capital to resume operation if they stop producing now. It’s therefore
a prisoner’s dilemma that has prevented some capacity from being shut
down. It can actually be argued that banks are also part of this game–as
mentioned by a steel trader, banks have been pushing mills to stay in the
market so they don’t have to admit large bad loans; the iron ore trader also said that for some mills, loan renewal
for next year has already been completed, which means the seasonal tightness in
liquidity towards year-end may not be as tough as we imagined."
Such prisoner's dilemmas are of course being played out among other Chinese
commodities producers and non-Chinese commodities producers as well.
CreditSights analysts last month cited the example of China Hongqiao Group, a local aluminum producer that was opting
to expand its output capacity in the face of lower metals prices.
Elsewhere in the world, the head of Chile's Codelco said last week
that he would rather rein in costs than curb copper production. The ultimate prisoner's dilemma in commodities? OPEC and its oil production.
Still there may be limits to steel mills' stubbornness, Macquarie says.
"It was thus quite gloomy to hear that the Chinese mills would just
keep producing no matter how much their losses get," the
analysts concluded.
"However, in our opinion, while all the factors mentioned above underline the
stickiness of Chinese steel production, they still have their own limits,
and sticking to them risks underestimating the pace of potential capacity
exits."
Steelmakers in China are so determined to unload a mountain of unwanted
metal on the world that profit has become less important than sales.
After years of expanding capacity to keep up with surging demand at home, Chinese
mills that account for half the globe’s output are shifting to buyers across
Asia, Europe and the Americas as the domestic economy slows. Fueled
by lower prices, steel-product exports are up 25 percent this year through
October to 92 million metric tons, sending mill losses this year to as
much as $537 a ton, data compiled by Bloomberg Intelligence show.
The onslaught has compounded a global surplus that probably will last for
years, Standard & Poor’s Ratings Services estimates. In India, where
the government imposed a 20 percent tax in September to slow a surge of
cheap imports, Chinese mills just cut prices to keep shipments flowing,
which means they are probably losing about $90 a ton, according to Mumbai-based
JSW Steel Ltd. Low-cost supply from China in Europe forced producer ArcelorMittal
to reduced its profit forecast and suspend its dividend, while top U.S.
steelmaker Nucor Inc. idled as much as 35 percent of capacity.
“The problem with China is that they want to sell at any price, not
withstanding the losses that they are incurring," said Seshagiri Rao,
the chief financial officer at JSW Steel, India’s third-largest steelmaker.
That’s an “unfair trade” strategy, Rao said.
‘Not Responsible’
Top steelmakers in China insist otherwise, noting that overcapacity is
a global issue that will take time to work itself out.
“China does not encourage steel exports, and Chinese steel mills produce
and sell their products in the fully competitive market,” said Zhu Guangsheng,
an official at the China Iron & Steel Association who handles media
queries. “To simply attribute the difficulties in one country or region
to Chinese enterprises is not responsible,” Zhu said in an interview Thursday,
citing a Nov. 25 statement from the group.
India’s government signaled Wednesday more curbs on steel imports will be introduced within weeks. The basket
of products that face the 20 percent safeguard tax may be widened, according
to Steel Secretary Aruna Sundararajan, who said the country may also impose
anti-dumping duties.
Regulators in other countries also are acting. A month ago, the U.S. Department
of Commerce proposed a 236 percent duty on imports of corrosion-resistant
steel from five Chinese companies, including Angang Group Hong Kong
Co. and Baoshan Iron & Steel Co. At the time, Baoshan called the levy
unfair and said its pricing was based on market forces
Trade Disputes
In Southeast Asia, Malaysia and Thailand have filed trade cases, while
Indonesia and the Philippines have checks in place to ensure inbound shipments
comply with standards, said Roberto Cola, chairman of the Selangor,
Malaysia-based South East Asia Iron & Steel Institute. India imposed
its tax on Chinese steel after imports surged 51 percent in five months.
Tata Steel Ltd. has closed the last blast furnace in Northern England, shedding 1,200 jobs, citing
high energy costs and cheaper imports. The European Steel Association,
known as Eurofer, said that as long as China pushes its surplus on the
global market, “traditional trade flows will continue to be distorted,
fueling the fight for tonnage, discounting while leading to margin erosion."
Chinese mills can afford to undercut competitors because the government
provides export rebates and subsidies for production, Cola said. Hot-rolled
coil, a benchmark for steel, cost $284 a ton in China, while the same
product fetched $330 in the U.S. and $420 in India, according to data from
Metal Bulletin Ltd.
Slumping global prices have been a boon to manufacturers, who say Chinese
supplies remain an attractive alternative because they are so much cheaper
than domestic steel.
Price Difference
"The price difference is very huge," said R.C. Mansukhani, chairman of pipe maker Man Industries Ltd. in Mumbai. Manufacturers in
India are finding ways to bypass trade restrictions by purchasing Chinese
products like sheets or slabs that don’t incur the import taxes, Mansukhani
said.
Even with a surplus, Chinese producers have been slow to adjust output.
Many steel companies are owned by regional governments that have “significant
reluctance” to closing plants or reducing capacity, because that would
mean cutting jobs at a time when the economy is slowing, according to a
Nov. 30 report by BMI Research.
The easiest shutdowns in China have happened and further closures will
get increasingly difficult, HSBC Holdings Plc said in a report Friday.
"Employment associated with steel mills is large enough that staff
layoffs could spark social unrest."
Expanded Output
Over the past two decades, China expanded capacity as the economy grew
at more than 9 percent annually and the country became the world’s largest
metals user as it built cities, cars, bridges and consumer goods. Crude-steel
output surged more than 12-fold between 1990 and 2014, and probably peaked
last year at 823 million tons, according to the China Iron & Steel
Association.
While production has begun to decline, demand is falling almost as fast,
with the economy expands at the slowest rate in a quarter century. Domestic
use will slide 3.5 percent this year to 685.9 million tons, according to
the World Steel Association. With a growing domestic surplus, Chinese exports
will top 110 million tons this year, more than Europe’s top four producers
combined, Bloomberg Intelligence estimates.
The glut forced Japan’s two largest producers, Nippon Steel & Sumitomo
Metal Corp. and JFE Holdings Inc., to cut their profit forecasts for this financial year as they reduce export prices to compete with Asian
supply.
“We don’t think the industry’s overcapacity will be resolved anytime soon,” said
Katsuhiko Ota, executive vice president of Nippon Steel. “The current conditions
will likely continue until structural reforms are conducted. The global
steel industry will face very tough times."
An estimated 400,000 steelworkers in China will lose their jobs, in line
with plans to slash crude steel production capacity by between 100 million
and 150 million tons.
The announcement was posted Sunday on government web sites, and reports
a decision made by the State Council on January 22 to cut steel, coal and
other basic industrial production in response to the global slump and declining
growth in China.
Li Xinchuang, head of the China Metallurgical Industry Planning and Research
Institute, said that the cuts in production would translate into 400,000
steelworkers losing their jobs.
“Large-scale redundancies in the steel sector could threaten social stability,”
Li Xinchuang told the official Xinhua News Agency Monday.
The State Council did not say when the cuts would be made, but China, which
produces half of the world’s steel, has already cut capacity by 90 million
tons in response to the growing slowdown in the Chinese and world economy,
and is under enormous pressure to do more. Along with the cuts already
made, the new cuts will amount to about a 20 percent reduction in steelmaking
capacity.
The reductions will have an enormous impact on Chinese workers. In addition
to those directly employed in steel making, it is estimated that for every
job lost in steel, another 3 jobs are lost in related and supporting industries.
Three million workers in the steel, coal, cement, aluminum and glass industries
are expected to lose their jobs in the next few years as these industries
seek to cut production by 30 percent.
Many of these employees are first-generation workers who migrated from
impoverished rural villages with hopes of a better life. Often their families
are dependent upon money these workers are able to send home.
As in the United States and every other country, investors responded to
the announced job cuts with joy. The stock price of China’s largest steelmaker,
Hebei Iron & Steel, rose 4.3 percent on the news, and the second-biggest,
Baoshan Iron & Steel, rose by 5.3 percent. The stock prices of China’s
coal producers also rose on the news of the layoffs.
According to the World Steel Association, China’s steel production in 2014
amounted to 822.7 million tons, or 49.4 percent of the world output of
steel. Japan is the second largest steel producer, at 110.7 million tons,
followed by the United States at 88.2 million tons and India at 86.5.
In 2015 world steel production fell by 2.8 percent. China’s steel production
fell to 803.8 million tons, or a drop of 2.3 percent, the largest fall
in 25 years. US steel production fell 11 percent to 78.9 million tons and
European production declined by 3.2 percent. Japan, Turkey and South Korea
also saw declining steel production in 2015.
The outlook for 2016 is even further cuts. Prices for steel have been on
a corresponding decline. The benchmark for hot roll steel has fallen on
the world market from over $600 a ton in February 2013 to less than $300
a ton in December 2015.
According to the World Steel Association there is currently an overcapacity
of steelmaking by 300 million tons. In other words, the world’s overcapacity
of steel is greater than the combined production in Japan, the United States
and India, the second, third and fourth largest producers combined.
US Steel, the second largest steel producer in the United States, reported
a $1 billion loss for the fourth quarter of 2015, for a total loss of over
$1.5 billion for the year. The steelmaker reports that its production has
fallen to less than 70 percent of capacity. Over the past year it has laid
off thousands of steelworkers and idled several mills.
The massive layoffs among Chinese steelmakers underscores the reactionary
nature of the United Steelworkers’ union campaign to blame Chinese steelworkers
for the decline in US steel production and resultant layoffs. Behind the
nationalism and chauvinism being pushed by the USW is support for the war
drive of the US government against China.
Steelworkers in China, the US, Japan, India and everywhere around the globe
are facing the same problems, brought about not by the workers of other
countries but by the fundamental contradictions of the capitalist system.
In place of nationalism, chauvinism and war, workers need an international
socialist policy that unites the workers of the world in a common struggle
to defend jobs and living standards.
Plans to shrink China’s bloated steel industry will probably fail to stem industry
losses or curb the deluge of exports that’s hurting producers from India
to the U.S. and Europe.
As much as 150 million tons of capacity will be shut under a five-year
blueprint that’s part of a swathe of supply-side reforms directed by President
Xi Jinping. The government is trimming the industry as demand sags after
decades of expansion. The cuts, amounting to 13 percent of capacity at
most, fall short of requirements, according to analysts from Capital Economics
Ltd., Macquarie Group Ltd. and Argonaut Securities (Asia) Ltd.
“The announcement is actually a disappointment,” Caroline Bain, a London-based
senior commodities analyst at Capital Economics, said by e-mail. “Now that
we know this is intended to happen over five years, the immediate market
impact seems minimal and could actually be negative.”
While steel production ell last year for the first time since 1981, demand is waning even faster
and the nation is sending record volumes overseas. Shares in the world’s
biggest mill ArcelorMittal have dropped 58 percent in the past year, partly because the exports are fueling a slump in prices and profits.
“China’s still going to be exporting steel and associated deflationary
pressures for a while,” Colin Hamilton, head of commodities research at
Macquarie in London, said by e-mail. The world needs 200 million tons to
250 million tons of capacity cuts, he said.
The blueprint includes a ban on new capacity, financial support for the
mills and encouragement of mergers and acquisitions. About 400,000 jobs
may be lost, a leading official with a state-owned consultancy said in
January.
Shares Rise
Steelmakers’ shares rose on Friday, with Angang Steel Co. up 3.2 percent
in Hong Kong and Baoshan Iron & Steel Co. gaining 2.5 percent in Shanghai.
A raft of Chinese steelmakers have warned of big losses or large profit declines in the past few weeks, with Angang Steel, the fourth-biggest, predicting a 4.38 billion yuan ($667 million) loss and Wuhan Iron& Steel Co. seeing a 6.8 billion yuan loss. The government has to balance a serious situation for the steel market
with the need for social stability, Helen Lau, analyst at Argonaut Securities
(Asia) Ltd. in Hong Kong, said by phone.
“It looks like China isn’t going to reduce supply according to expectations,”
Lau said. “They may want to make sure that workers can be relocated slowly
to other areas and ensure a smooth transition.”
People's Daily: China Steel will not become a "world burden"
At 05:54 on February 7, 2016 Comprehensive
Global economic recovery is weak endless accusations unfounded
China Steel will not become a "world burden" (Spotlight)
Our reporter Wang Junling
If an industry as a weak world economy footnote, the steel industry would
be a suitable choice. Recently, some EU officials will again spearhead
the steel industry downturn China, said it would three kinds of steel products
in China to launch a new anti-dumping investigations. Experts pointed out
that although China has a large surplus of steel production capacity, but
the downturn causes of the world steel industry complex, can not all be
attributed to China. Need to see, China is actively and vigorously to resolve
the overcapacity in the steel industry, improve the quality of supply,
which is the global steel industry is undoubtedly a long-term positive.
Cause a lot of the industry downturn
In a letter to Chinese Minister of Commerce letter, EU Trade Commissioner
Malmstrom noted that in 2015 China's steel exports surged more than 50%,
the price of some products decreased by 50%, far exceeding the decline
in raw material and energy prices so she expressed the hope to see the
results of China's crude steel output down as soon as possible.
It is understood that, compared withChina's longblast furnacesteelmakingprocess, many countriesoverseasshort-based steelmakingprocess, some of theiron and steelindustry is relativelyweakcountries evenwithout
thesteelrolling millsonlyenterprises, whichgetevenChinesesteelmarketfavor, can easily lead toprotectionistsentimenttrading partners. "On one hand, China's steelproductionindustrycanindeedtoo large, the 2015steel outputhas accountedfor half ofglobalexportsexceeded 100 million
tons, whichwill have greaterimpact on thesteel marketin Europeand other places; on the other hand, Chinesesteel companiesthescaleis usually veryobvious, and because the land, the environment, lowerfinancing costs, lowerproduct pricesaccordingly, some of thecountries haveto care about. "Fellow ChineseAcademy of Social SciencesInstitute of industrial economicsMr Caoinan interview with thisreporter,Say.
In fact, the Chinese steel industry pressure to cut energy transformation
and upgrading of the starting gun has sounded, especially with the recent
"State Council on the steel industry to resolve the overcapacity achieve
comments turnaround development," the release, can be expected in
the future policy efforts will continue to increase.
"Opinions" clear, from the beginning of 2016, with 5 years before Yajian crude steel production capacity of 100 million
-1.5 million tons, while various regions and departments may use any name or by any means
filing new capacity steel project. In resolving the existing excess capacity,
the "opinions" from environmental protection, energy consumption,
quality, security, technology, etc. given a clear mandate and exclusion
criteria, and out of the "companies take the initiative to cut energy
pressure", "pressure mergers and acquisitions production can
"" transferring production can move press "" international
cooperation transfer their production capacity, "four prescription.
It is worth noting that the "opinion" also paid particular attention
to product upgrades steel industry, proposed to strengthen the production
and processing of iron and steel industry and downstream steel industry
needs docking, iron and steel enterprises in accordance with guide "Early
intervention research, improved follow-up" model, focusing on promoting
development and application of high-end steel products required for high-speed
rail, nuclear power, automotive, marine and ocean engineering and other
areas of major technical equipment.
Traditional steel industryeconomicdriving forceis large,werealso the firstsupply-sidestructural
reformsindustries.Althoughovercapacityis the mainfeature, but in addition toYajianyieldfutureproductstructure, regionalstructure ofthe steel
industry,the institutional mechanismshouldusher ina deeperadjustment, especially in the institutional mechanism, according to the rules of the market, according to environmentalstandards, allowbusinessestoadapt to the marketmergers andinefficiententerprises. "Mr Cao said.
Under theshadow ofovercapacity, steel companiescan"re-energized" it? Experts said thatfrom the domesticperspective,China's urbanizationhas enteredthe
late, water conservancy facilities, and otherunderground pipegalleryupgrade involvesimprovingthe qualityof
urbanizationconstructiondemand remainslarge; itisoverseas, "along the way"along thecountryalsohas a hugeinfrastructurepotential, which will no doubtprovide a vastglobalmarkethigh-quality steel. In addition, with the rise of new industries, the growth of high-endsteel productsdemandsegmentsisimpressive. High-speedrail, for example, not only their ownhigh-speed trainwheeland the vehicle bodysteeldemand
is very high, andthe qualityofrailand high-speedturnoutssteelhasunique requirements, mainly in steelpurity, railsurface qualityinternalquality, precisiongeometryand flatnessand so on.In recent years, Chineseenterprises in therailsmelting,rolling, transportation, welding, laying,sandingand other sectorshave achieved atechnology upgrade, in many wayshas been reachedworld-class level.
In order toseize the high groundin this round of"shuffle", the Chineseiron and steelenterprises haveembarked on"reform and turnaround" journey: Baosteel GroupBayi Iron & Steel(6.060, 0.00, 0.00%) andSGISrecentlysuspendedwhileplanassets involved"major issues" reorganization; Panzhihua Iron and steelGroupfor the marketneed to develop alow-pressuresteelpipe industry, to seizea lot of marketsuccess; Maanshan Iron and steelGroup, throughupgrade theirlevel of logistics information, so that customersgetmore comprehensive services...... Mr Caoexpectsfuturesteel companieswilldesign,market structureresearch and
development,manufacturing, finance,services as oneintegrated supplier ofmetal
products, steel productswill also bemore segments, those who have masteredthe artmarket segmentscompanies willusher in the
realspring.
The China government has ordered steel companies to shutter capacity,
a painful process that could take years to complete. In the meantime, Chinese
steel companies are boosting exports. China goverment aims to reduce steel
making capacity 100-150 milion tons within 5 years. However Chinese steel
companies would not hear the goverment instruction. Everything will proceed very slowly.
Those steel shipments aren't enough to offset freight carriers' lost
profits -- but they are enough to crush the margins of steel companies
outside China.
Companies like Tata Steel have announced some plant closures in Europe,
but the industry's main seems to be on lobbying Brussels to impose tariffs
on imported Chinese steel Brussel also will go slowly.
According to Bloomberg, US Department of Commerce preliminary determination, cold-rolledflat products from China,the existence of dumping, the United Stateswill beChina's steel imports imposed266 percenttariffs. In addition, the United States for cold-rolled flat products from Brazil, India, South Korea, Russia, Japan and the UK are also tariffs.Brazilface a39 percentpunitivetariffsthe United Statesto South Koreaimposeda 6.9%tariff. This is sincelast Decemberthe US government to punish the second steelmakers abroad. Last June,the United States largest steelmaker United States Steel Corporation(US.
Steel)and the second largest steel producer Nucor(Nucor)trade litigation filed accusing some
competitors embodiment unfair subsidies and other illegal trade means. The US Commerce Department had announced last December 15, will becold rolledflat steelimports fromChinaup227.29 percent levy import tariffs.At present,266%ofthe proposed tax rate of nearly 40 percentage points higher than
previously.
Cold-rolledflat steel is widely used in automobile manufacturing and construction
industries. SmokeSino-USsteel trademore and more concentrated. Wall Streetknowledgementionedlast December, the US preliminary investigation found that Chinese exports to the US mainlandcorrosionsteelprices are too low, are not fair, will be chargedup to 256% of the tariff. Mainland China is also facing the steel tariffs as well as India, South
Korea and Italy's steel exports to the United States, but the United States after three steel produced by the proposed tax rates
are significantly lower than the Chinese, in the range between3.5%-6.9%.
Dongbei Special Steel Group Co., based in the northeastern city of Dalian, said it failed to repay the
sum of interest and principal due Monday, according to a statement posted
on the Chinamoney website. The company said in a separate statement that
it also might not be able to repay 1 billion yuan due April 3
on a 90-day bill because of tight liquidity. The company sold 800
million yuan in one-year bonds last year with a coupon of 6.5 percent,
according to data compiled by Bloomberg.
Chinese firms are struggling with surging debt burdens as Premier Li Keqiang
seeks to weed out zombie corporations amid the country’s worst economic
slowdown in a quarter century. At least a dozen companies have defaulted
on bonds over the past two years even as the central bank loosened monetary
policy. Nanjing Yurun Foods Co., a sausage maker, and Zibo Hongda Mining
Co., an iron ore miner, both said they defaulted on notes this month.
Dongbei Special Steel’s missed payment comes just four days after the company
disclosed that its former chairman, Yang Hua, was found dead by hanging
at his home. The company said the death was under investigation by the
relevant authority.
Other Chinese steelmakers are also facing rising debt pressures. The
northern city of Tianjin plans to set up a committee of creditors to help Bohai Steel Group Co. “get
out of trouble,” Caixin reported March 18.
Minister of Human Resources Yin Weimin said Feb. 29 that about 1.8 million steel-and-coal workers would be laid off
as the country cuts industrial overcapacity and reforms bloated state-owned
The rising price of iron ore defies the growing supply along China’s waterfronts
An iron-ore stockpile at the Port of Rizhao, in eastern China's Shandong
province. Stockpiles at ports are growing, even as prices continue to rise.Photo: Imaginechina
By Rhiannon Hoyle
SYDNEY—At hulking ports along China’s coast, iron ore is piling up. At
the same time, the price paid for iron ore in China, shipped
from countries such as Australia and Brazil, is at its highest level in
months.
That disconnect has many traders and analysts questioning whether the value
of the steelmaking ingredient is headed for a fall.
This week, the spot price of iron ore climbed as high as $58.80 a metric
ton, its most expensive since early May and up 37% from where it started
the year. Over the same period, stockpiles at Chinese ports have swelled
by 13%, to 104.5 million tons, their highest since December 2014,
and are creeping back toward that year’s all-time high, according to Shanghai
Steelhome Information Technology Co., a market information provider.
Port inventories of iron ore, one of the world’s most traded commodities
along with oil, are a closely watched measure of how much excess raw
material might be washing around in the market. The iron-ore trade, which
was long dominated by a small number of major buyers and sellers agreeing
deals in closed-door negotiations—and where a derivatives market remains
in its infancy—doesn’t have the same wealth of data available compared
with commodities such as copper and gold, or even oil, another market awash
with supply.
U.S. oil prices fell to a two-month low this week after federal data showed U.S. inventories of crude oil and
refined products are at a record high.
High inventories can signal weak physical demand and many in
the iron-ore market including Nev Power, CEO of world’s No. 4 exporter
Fortescue Metals Group Ltd.FSUGY3.74%, point to moves in China’s port stockpiles when evaluating surpluses or
shortfalls.
Finding ways of understanding where prices could be headed is arguably
increasingly crucial as companies navigate a prolonged and extremely volatile
downturn. That is the case across many commodities markets including oil
and copper, although it is particularly pertinent in iron ore where trading
data is sparse and surveys are relied on heavily.
“The port stocks are very visible,” said Paul Gray, iron-ore analyst at consultancy Wood Mackenzie. “They are one of the few
indicators people can see very easily.”
When China’s port inventories surged to their highest recorded level in
2014, above 113 million tons, iron-ore prices began a sharp slide that would push the market lastingly below $100 a ton for the first time
in years.
Over the course of the prior year, the price had slipped 7%, while stocks
ended 4% higher. Conversely, in 2012, prices rose and stockpiles fell.
“It’s reality that when the port stock rises, a drop is seen in iron-ore
prices,” said Karun Mittal, a marketing manager at Welspun Steel Ltd. in India. “At this
time,” though, he said, “we observe a different attitude.”
Instead of fretting about the swelling stocks, traders are focused on their
calendars: For the rest of this month, there will be restrictions on steel
production in the steelmaking hub of Tangshan, in China’s Hebei province,
to clean the air for a memorial in the area to the victims of the deadly
earthquake in 1976.
That has helped to push Chinese steel prices higher, suggesting the country’s
steelmakers are now more profitable and consequently able to keep more
furnaces running.
A drop in stockpiles of finished steel and speculation about
more stimulus in China have also been given as reasons for iron ore’s recent
strength.
‘I don’t read the current accumulation of inventories as something immediately
bad for the price of iron ore.’
—Georgi Slavov, head of iron ore and shipping research at Marex Spectron
Record daily production in June fueled an export boom, even as other countries
threw up barriers
By Biman Mukherji
China’s steel juggernaut isn’t taking a rest.
Contributing to a global glut, the country churned out steel at a record
daily pace in June, fueling an export boom even as the U.S. and other countries
raised walls of punitive import taxes meant to protect their own steel
industries. Some of China’s steel-producing rivals say the country dumps steel on
global markets at unfairly low prices, a charge that China denies.
Steel exports from China, the world’s top producer, in the first six months
of the year hit 57.12 million metric tons, up 9% from a year earlier, according
to China’s General Administration of Customs. For June alone, they reached
10.9 million tons, up 23% from a year earlier and 16% from May.
“Despite antidumping duties, Chinese steel is quite competitive,” said
Hongmei Li, an analyst at the energy and commodities information provider Platts.
“Prices have been recovering quite steadily in general in global markets
for the first half of this year, and China has been able to keep comparatively
low production cost due to relatively low iron-ore and coke prices against
steel scrap.”
Chinese steel production in June averaged a record 2.32 million metric
tons a day—around 69.5 million tons in all—according to the National Bureau
of Statistics. Rivals can hope that China will tap the brakes soon, making
good on a pledge to reduce annual capacity by as much as 45 million tons
by the end of this year as domestic demand slows. China has the capacity
to produce 1.2 billion tons of steel a year, and it produced about 800
million tons last year, or about half the world total.
China’s steel production this year is likely to be down 2% to 3% from
last year, but percentage growth in steel-product exports is likely to
be in the high single digits from last year’s 112 million metric tons,
said Jiming Zou, senior analyst at Moody’s Investors Service.MCO-0.05%
The production boost early this year was partly fueled by a rise in steel
prices on Chinese exchanges, up more than 50% during the first four months
of 2016 as speculative trading drove up spot-market prices.
This tempted Chinese steel producers to fire up idled or underused factories.
Steel prices have fallen from their peaks in April, but the mills’ margins
haven’t been hugely dented because the prices of critical raw materials—such
as iron ore and coke—have remained relatively low.
On Wednesday, BHP Billiton,BBL2.42%the world’s biggest miner by market value, said it will tip more iron ore
into the global market in the year ahead, despite a price-sapping glut.
BHP reported an average price of $43 a ton for its iron ore for the last
financial year, down 30% from the year before.
Sentiment in China’s steel market rebounded strongly in July: Most market
participants say they expect steel prices to rise over the next month,
according to the latest S&P Global Platts China Steel Sentiment Index.
The index’s headline reading was 53.71, a three-month high and up from
15.92 in June. A reading above 50 indicates expectations of an increase/expansion;
below 50, a decrease/contraction.
After a drop in prices from their peak reached in late April, prices of
steel and other metals have perked up again this month largely on the hopes
that China will introduce monetary measures to stimulate the economy.
China’s June output was also boosted to help make up for the loss due to
a production shutdown in Tangshan scheduled at the end of July to honor
victims of the deadly 1976 earthquake, said Mitchell Hugers, commodities analyst at BMI Research. Chinese steel output is likely to
decline in coming months because of a slowdown in real-estate construction,
he added.
Mergers will
help speed up elimination of excess capacity
China is
considering a sweeping overhaul of its steel industry that would consolidate
major producers into two giants, with one located in the north and another in
the south, according to people familiar with the plan.
Hebei Iron
& Steel Group, the nation’s biggest mill by output, and Shougang Group will
be combined into Northern China Steel Group, while No. 2 producer, Shanghai
Baosteel Group Corp., and Wuhan Iron & Steel Group Corp. will be merged
into Southern China Steel Group, said the people, who declined to be identified
because the information is confidential. Shares in the listed units of Hebei
and Shougang rose on the news.
The
state-owned Assets Supervision & Administration Commission didn’t respond
to a request for comment on Monday, while a Baosteel Group spokesman declined
to comment when reached by Bloomberg. Calls to Hebei, the news department at
Shougang and Wuhan Iron & Steel were not answered.
The potential combinations would give
Chinese mills the scale to rival global giants such as ArcelorMittal, and
enhance government efforts to reduce overcapacity as part of its drive to
overhaul an inefficient state sector. Smaller steel companies could later
be absorbed into the two new groups once they are established, although nothing
has been decided, according to the people familiar with the plan. The plan has
yet to win formal approval, they added.
‘Little Room’
The plan
“will help accelerate eliminating excess steel capacities,” Helen Lau, an
analyst at Argonaut Securities Asia Ltd., said from Hong Kong. “It will also
boost their competitiveness and strengthen their customer bases and leave
little room for non-competitive smaller mills.”
Shares in the
listed units of Hebei and Shougang rose the most in over two weeks. Hesteel Co.
climbed as much as 2.8 percent, while Beijing Shougang Co. added as much as 3.7
percent. Baosteel and Wuhan’s listed units are suspended from trading as their
parents discuss a restructuring, which analysts have said may presage a union.
Even though
China’s steel output has peaked, the domestic market remains saturated, Chen
Derong, general manager at Baosteel Group, told a conference in May. As the
nation seeks to clear its surplus, exports are running at record levels,
sustaining a global glut of the metal and drawing fire from competitors across
the globe.
China’s crude
steel-producing capacity hit a record 1.2 billion tons at the end of 2015,
according to the China Iron & Steel Association. The country is the world’s
largest steel producer and accounts for about half of global supply of the
alloy that’s used in construction, autos and appliances. The government has
pledged to cut as much as 150 million tons of capacity by 2020.
— With
assistance by Winnie Zhu, and Steven Yang
Before it's here, it's on the Bloomberg
Terminal. LEARN MORE
/
