China Crude Steel Output Is Set to Hit a Record
Source: www.chinamining.org Citation: Dow Jones Date: Jul.25, 2013
China`s crude steel production this year is set to hit a new high, according to a government forecast, in the latest sign that state measures to control overcapacity aren`t working and global prices will likely remain sluggish.
China produces slightly less than half the world`s steel, and mills here haven`t cut production significantly even though growth in demand is slowing. As a result, a rising flood of Chinese steel exports is weighing on the world market.
At the current pace, output of crude steel-the basic building block for China`s construction and manufacturing industries-could reach 790 million metric tons in 2013, Zhu Hongren, chief engineer at the Ministry of Industry and Information Technology, said Wednesday. The previous high was last year`s 716.5 million tons.
The government has promised new measures to combat steel overcapacity but has yet to unveil them. In the past, these have typically consisted of moratoriums on the building of new plants, efforts to encourage producers to mergeand tougher environmental rules, designed to both reduce pollution and encourage companies to close older facilities.
Output has surged despite the fact that "the industry hasn`t yet emerged from a trough," Mr. Zhu said in comments posted on his ministry`s website.
"In this situation of high steel output, steel prices have continued to fall and inventories are still relatively high," Mr. Zhu said. "Some mills have no intention of cutting output."
The production binge and weaker macroeconomic conditions hit prices. According to Bernstein Research, aggregate monthly profit at the country`s 80 largest steelmakers fell to 150 million yuan ($24.4 million) in May from 210 million yuan in April, a result the firm described as "barely break-even in these two months."
Steel prices in China rose 2.2% in June after falling 14% in the first five months of the year, according to Shanghai Futures Exchange data.
The slight recovery led industry bellwether Baoshan Iron & Steel Co. to keep its prices unchanged for August, after cutting them in May, June and July. "We have seen some moderate recovery in steel prices, but we do not think the upward trend is sustainable unless significant capacity is curtailed or China implements a stimulus," said Bernstein analyst Vanessa Lau.
A spokesman for Baosteel Group Corp, Baoshan`s parent company, said Wednesday that Baoshan wouldn`t comment on its plans for pricing or output.
The high output reflects Chinese steel mills each deploying what amounts to a beggar-thy-neighbor policy in their production practices, analysts say.
"The attitude among mills is, if I cut my output, others may raise theirs," said Ma Haitian, a steel analyst for Beijing`s Antaike Development consultancy. "So it leads to a situation of everyone waiting to see who will cut first."
The state-backed industry group China Iron and Steel Association has blamed smaller mills for overproduction before, but analysts say both large and small mills have been responsible for jacking up output in recent months. Some steelmakers cut output earlier this year amid climbing losses but as soon as "the steel market showed signs of improvement, steelmakers began to restore capacity," the association said in a report Monday.
The percentage of capacity in use in the Tangshan area east of Beijing, the heart of China`s steel industry, reached historical highs of 95% in April and May and around 90% in June, Mr. Ma said. Global utilization rates were below 80%, according to an Ernst & Young report.
China`s steel exports have surged, rising 12.8% in the first half from a year earlier even as imports fell 1.8%. The rising exports have prompted U.S. analysts to warn for months that Chinese mills may be increasing their sales overseas to make up for weak demand at home.
Global steel prices have fallen 6% in the first half of this year, according to data from the MEPS steel consultancy.
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