China Really Cutting Steel Capacity?

China Really Cutting Steel Capacity?

There have been many stories, tweets and accusations that the Chinese government has agreed to cut steel capacity, but actually had not done so.  In some cases, it appears they counted capacity cuts from mill shut down years ago, or planned expansion from existing mills as capacity cuts.  What we are really interested in is steel tonnage capacity from steel mill currently in operation.

Today’s Wall Street Journal article paints a better picture of China actually reducing existing capacity.

If this trend continues, our world steel supply will slowly become more balanced.

“Donald Trump is threatening tough tariffs on steel imports. At the Group of 20 summit in Hamburg, Western leaders spent the weekend fulminating about steelworker jobs.

But in China, where massive steel overcapacity has helped sink global prices, a funny thing is happening: Steel prices are rising, even as most commodities remain under pressure. That trend, if sustained, could have major implications for global markets—and politics—as the plight of steelworkers remains a political live wirethroughout the Western world.

And unlike in the past, there are hints that the latest rally isn’t only about China building more apartment towers. Overcapacity, the scourge of Chinese industry and a major cause of the country’s huge debt problem, is a moving target: Factory-utilization rates always go up when the economy is doing relatively well, as it is now.

That doesn’t seem to be the whole story this time, however. Steel prices are rising, but overall inflation is cooling—June data released Monday showed most factory-gate prices trending sideways or down, but steel prices rallied. Also, prices for steel rebar—often produced from scrap by small electric induction furnaces—have done especially well this year. Those same furnaces this year have been a main target of Chinese regulators, who vowed to eliminate them by mid-2017.

There is some evidence that campaign is working. Chinese production of steel products is down from a year ago despite healthy demand from developers in inland cities, where falling housing inventories are supporting construction.

Less supply and decent demand mean gross margins for China’s iron-and-steel sector as a whole hit their highest level since 2008 in the first quarter, and have now been above 8% for nine straight months, the best performance since the global financial crisis. Partly as a result, listed Chinese steel shares such as Hesteel and Baoshan are on a tear: They are up 34% and 14%, respectively, so far this year. And in contrast to iron ore, steel has held on to most of its price gain after last year’s U.S. election.

China has a long and checkered history of “closing” excess steel and coal capacity only to allow it to roar back when inflation ticks higher—if broader price pressures in the economy re-emerge, that pattern might repeat itself. And to be sure, overcapacity remains severe despite limited progress: Margins at 8% are nothing to write home about, considering they were consistently above 10% in the early part of the previous decade.

Still, any sign of progress is welcome. Investors watching the world’s leaders duke it out on steel can take some comfort in some signs of progress, however preliminary, in China.”

 Nathaniel Taplin, WSJ, July 10, 2017

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