One may think that China’s steel industry could hardly be in a worse place.

Half the industry is losing money in spite of falling iron ore and coking coal costs and a reduction in domestic power costs all aiding steel producers on the supply side. Even among those that did not lose money in the first half, margins are said to be razor thin and banks are reported to be cutting credit lines and presenting difficulties in rolling over loans according to China Iron and Steel Association (CISA) comments posted by Reuters.


Concern in China is rising that June’s 3.4% fall in auto sales, compared to the year before, could be the start of a trend. After two years of consistent growth and high capacity utilization the world’s largest car market is showing signs of fragility.

Data from the China Association of Automobile Manufacturers quoted in the FT suggests China’s automotive market may be maturing after years of breakneck growth.


This is part two of an analysis of how China’s recent stock market crash affects neighboring India.

The Indian arm of global credit rating agency Fitch said with soft demand in China, base metal prices had gone down in the range of 2-21% in the first six months of 2015.

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On a year-to-date basis, Chinese domestic hot-rolled coil steel prices declined by 21%. London Metal Exchange nickel prices are down by about 12%, LME copper prices by 9% and China alumina prices by about 10%. In the last one month, iron ore prices dropped by 20%, Shanghai steel prices by 16.4%, and zinc prices by 7%.

What’s This Mean for Steel?

In reference to India’s steel sector, rating agency Ind-Ra pointed out that Indian manufacturers were already struggling with low capacity utilization, and lukewarm domestic demand was unlikely to benefit the margins of manufacturing units in the short term.

So was there any silver lining at all for India where the Chinese downturn is concerned? Depends who you listen to or talk to. Here’s what a report in the Business Standard claimed — the economic downturn would be good for smart cities. The rationale — copper is trading at a 6-year-low and China is the world’s top copper consumer, accounting for 40% of global consumption.

How About Aluminum?

Similarly, aluminum is trading at new lows and was already trading at prices below cost of production of many Chinese companies. For India, as a consumer, this is good news as the cost of constructing new infrastructure, especially smart cities, would reduce.

And that extends to a lower price for a technology innovation dear to almost everyone in the world, according to the report. Mobile phones will be cheaper, it predicted. If the Chinese really devalued their currency, world markets will be flooded with Chinese goods at low prices affecting exports of other countries, including India.

As for the rest, such as automobile manufacturers, it could possibly get only worse in the coming days.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.


Gold hit a fresh five-year low today and China’s top steel-producing city is getting serious about enforcing pollution standards.

Gold Keeps Falling

Gold stretched its losing skid to six sessions and made a fresh five-year low in early trading Monday. At its low point Monday, an ounce of gold dipped below $1,100 to $1,080 — its lowest level since February 2010 — and was down 4.6% before recouping some of its steep losses.

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About 8:30 a.m. ET, an ounce of gold was down $18.80, or 1.7%, to $1113.10. Last week, gold tumbled more than 2%.

Our Lead Forecasting Analyst, Raul De Frutos predicted the yellow metal had further to fall last week.

Tangshen to Crack Down on Pollution

China’s top steel producing city of Tangshan will punish steel companies if they fail to meet tough new pollution standards over the next three months, according to new industry guidelines. This could force closures and help ease a severe capacity glut. China is using tougher environmental rules to help tackle a severe glut of steel capacity that has depressed prices.

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The statistics illustrate the dire state of the Chinese steel market only too clearly.


Excess Chinese steel capacity has nowhere to go but export markets.

Crude steel output dropped in June by 0.8% from a year earlier while apparent consumption of steel for the first five months declined by 5.1%, according to Reuters. Meanwhile, steel prices are at their lowest in more than 20 years. In spite of weaker iron ore prices, large steelmakers’ losses on their core business more than doubled for the January-May period from a year earlier.

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Steel prices have been sliding as construction activity has remained weak, rebar futures on the Shanghai Futures Exchange have lost about 25% so far this year, on top of losing 28% across the whole of 2014.

Market Share at Risk

Steel mills have talked about bringing forward maintenance and refurbishment work this summer in an effort to curb the over-production and stabilize prices, but, so far, there has been little sign anyone wants to be the first to risk losing market share.

Rather, exports of steel products surged 28% to 52.4 million metric tons in the first six months of the year as mills dump excess production overseas. According to Reuters, CISA members (who comprise the top 100 mills) posted a loss of 16.48 billion CNY ($2.65 billion) for their steelmaking businesses in the June-May period, up from a loss of “just” 6.12 billion CNY ($984 million) for the same period last year.

The Chinese economy, in broad GDP terms, has been slowing. Depending on which numbers you look at (nominal or inflation adjusted) it is 5.8% or 7%. The inflation adjustment is a Beijing black box fudge factor and you can take it or leave it, but the underlying trend has been down earlier this year and is, at best, steady today.

Manufacturing, Construction Worse Off

Within that, though, manufacturing is suffering more than the wider economy. According to CNBC, Chinese industrial output for June rose a nominal 6.8% year-on-year, while last month’s retail sales climbed 10.6%.

The booming stock market in the first six months of the year will have contributed to that service sector GDP number and doubts must be raised over the near-term prospects for a stock market that was being propped up only by government intervention. Chinese stocks are still suffering from last week’s market shock.

If prices return to falling, as they surely would without Beijing’s life support, then both financial sector activity and consumer sentiment could suffer in the second half. Under such circumstances, an increase in steel demand seems even more remote and steel mill closures more likely. In the meantime, expect export markets to continue to be the destination of choice for unwanted production. If mills don’t mothball production and demand doesn’t pick up, it’s the only game in town.


Never mind physical demand from end users, the omens for copper demand from the financial sector are arguably even worse if a recent paper covered by the Financial Times is correct.

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“Carry Trade Dynamics under Capital Controls: The Case of China” by Zhang Xiao, a fixed-income analyst with BNP Paribas, and Christopher Balding, associate professor at the HSBC Business School at Peking University’s Graduate School in Shenzhen, finds strong evidence that Chinese copper stocks were being used “primarily to facilitate a carry trade under capital controls.”

A roll of copper wire

Soon, in China, this will now be just a roll of copper and no longer an investment vehicle.

It is no secret that because of higher interest rates in China, compared to the rest of the world, Chinese investors have borrowed money offshore using a letter of credit from a bank to import copper. This was among other metals used but copper was the favorite. This was the scheme: Put the metal in a warehouse, and then invest the money in higher-yielding assets like property, financial products, or invest in manufacturing facilities.

More Than Half of Copper Used for Financing

The FT reports that some Chinese executives estimate that as much as 70% of China’s imports of refined copper were used to obtain financing rather than for actual consumption.

If the research backing the report is correct, the closer alignment of Chinese interest rates to global rates will negate the demand for this form of shadow financing and naturally reduce copper demand as a result. There is already considerable evidence to suggest this is already happening.

Chinese copper imports have been falling. Chinese interest rates have been reduced four times in the last eight months with the current rate at a record low of 4.85%. With investment depressed and the Chinese stock market tanking, there seems little prospect for interest rates other than to continue to fall, don’t bet on a significant pick up in copper anytime soon.

Chile Drops the Supply Side Ball

On the supply side, high-quality copper concentrate shrank more than expected in the first half of this year due to output delays from top mining nation Chile.

This may support prices later in 2015 but, if the Chinese carry trade demand is as high as the FT suggests, then it would likely outstrip any shortage in concentrate.

Production from two of four mines in Chile that churn out clean, standard concentrate was stalled in the first half as the country was hit by floods. The world’s top mine Escondida, has not tendered surplus concentrate for months, according to Reuters.

Smelters blend clean concentrates with supply from mines that have mpurities such as arsenic, which have become more common as miners dig deeper into the earth’s crust in Chile.

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It’s no secret that China’s growth is slowing. Iron ore and copper prices are screaming reduced demand from the rooftops and China’s GDP figures have been gradually declining for the last few years.

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Officially, the country is on track for 7% growth this year, stellar by most other countries’ standards, but in China’s case they have millions to lift out of comparative poverty and the lower the GDP growth, the less wealth generation there will be to achieve that aim. China’s per capita GDP is still a fraction of the US’ despite being the second-largest economy in the world.

NBS: Growth Exaggerated?

Recent data from China’s National Bureau of Statistics (NBS), though, suggests growth may, in reality, be even slower than headline figures suggest, according to the FT this week.

Reviewing the first quarter numbers in more detail, the FT suggests the 7% growth figures the NBS is quoting are hiding a marked slowdown in investment and consumption. GDP growth is measured by three components the paper says – consumption, investment and net exports.

Net exports add to national expansion to the extent that the country exports more than it imports, but the contribution has traditionally been a very small part of China’s GDP number in spite of the country running a massive export-orientated economy for the last decade or more. Investment and consumption make up the majority of China’s GDP, for the whole of 2014 net exports contributed just 0.1% of the 7.4% growth reported for the year, already China’s slowest annual rate of expansion in a quarter-century.

Exports Up, Growth Actually Down

In the first quarter of this year, however, net exports contributed 1.3% of the headline 7% growth, while consumption and investment accounted for 4.5% and 1.2%, respectively. Without the boost from net exports, therefore, first-quarter growth would have been much lower — at about 5.7%.

Nor is the growth in net exports due to a strong export performance, it is due to a fall in import costs as commodity prices have slumped. First-quarter exports were up only 4.9% on the same period last year, but the collapse in global commodity prices meant that the value of China’s imports over the first three months of the year fell 17%, resulting in a large surplus. Unless commodity prices continue to fall in the second half of the year that contribution may disappear toward year end.

Source: The Financial Times

Source: The Financial Times

Beijing is aware of this. Interest rates have been cut four times since November in an effort to boost consumption and investment, but the collapse of an overheated stock-market is not helping the situation.

How to Fix Debt-Created Growth?

The Shanghai and Shenzhen stock exchanges, which have lost about 30% of their value since hitting seven-year highs last month, are looking increasingly vulnerable to further falls, adding to worries that Q2 growth may be even lower.

According to the FT, Chinese authorities have also instructed banks to continue to lend to infrastructure projects even if they might be insolvent and eased standards for local government bond issues — part of a larger plan to roll over some of the CNY 22 trillion ($3.5 trillion) in debt accumulated by local government finance vehicles.

With investors’ concerns very much focused on Greece in recent weeks, there hasn’t been a great deal of attention given to the deteriorating situation in China. Many investors have been betting on a stimulus package from Beijing to boost activity for the last twelve months, but so far it has not materialized and existing problems with excessive debt will probably dissuade the government from embarking on anything like we have seen in the past. When the focus on Greece subsides, investors will have a new cause for concern, expect Q2 to be worse than Q1 for China’s GDP.

This September: SMU Steel Summit 2015


The World Bank released a damning report on China’s banking sector this week entitled “China Economic Update.”

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In unusually forthright language, the bank said Beijing urgently needs to overhaul the government-run banking system that subsidizes state industry at the expense of savers and provides little support for entrepreneurs and emerging industries encouraging an unregulated shadow banking sector that, in turn, creates risks.

Government as Both Bank Owner and Regulator

According to US News & World Report, quoting sections of the bank report, Beijing needs to separate its roles as owner of China’s banks, regulator and strategic planner and to construct a system that channels more lending to productive industries and manages risks better. The Chinese state has formal ownership of 65% of commercial bank assets and de facto control of 95% of assets, according to the report. It said that while some other countries have state-owned banks, by comparison using the same calculation that figure is 74% in India and 40% or so in Russia neither of which a paradigms of free enterprise, China’s entire financial system is government-dominated.


For China to truly prosper, the World Bank says Beijing must stop being both regulator and owner of its banks.

“Instead of promoting the foundations for sound financial development, the state has interfered extensively and directly in allocating resources,” the World Bank said, adding reducing the “unique and distorted role of the state” in banking and the wider financial sector was crucial, according to a further report on the World Bank report in the UK BusinessInsider.

How the China’s Banking System Creates More Debt

The article accused China of, “Wasteful investment, over-indebtedness, and a weakly regulated shadow-banking system.”

In some cases, it added, authorities were simultaneously owners, regulators and customers of banks.

The bank says further growth is at risk if these distortions in the banking system are not addressed and after raising the same concerns in their 2012 report said risks to the system had actually increased in the interim. China itself has set a target of about 7.0% growth in GDP for this year, a figure the bank broadly accepts saying it should be similar next year before slowing further in 2017 to about 6.9%.

This September: SMU Steel Summit 2015


Crude steel output will shrink as much as 2% this year, according to Bloomberg reporting data from the China Iron & Steel Association.

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That’s lower than the group’s March estimate of a 1.1% decline and would be the first contraction since at least 1990 the paper says. Crude steel output will shrink to 807 million metric tons this year from 823 mmt in 2014, according to the steel association as producers shut capacity.

Source Bloomberg

Source: Bloomberg

The reduction is being driven by a number of factors but profitability, or the lack of it, seems to be the greatest. Iron ore prices have risen by 40% in just two months as low port stocks at China’s ports suggested a tighter supply market Reuters reports. The market is speculating that producers and traders are holding back supplies in an effort to push up prices but top producer Rio Tinto Group pours cold water on that theory saying they are not in the business of playing the market month by month and supply is plentiful.

Supply Up, Demand Down

The firm will likely ship 350 mmt this year, up from 300 mmt last year. Lower seaborne iron ore prices in Q1 appear to have finally taken their toll on domestic iron ore producers, though, with production dropping 11% in the first five months of 2015 as higher cost producers have been squeezed out.

Source: Bloomberg

Source: Bloomberg

Few are expecting iron ore prices to remain elevated with steel production falling and supply plentiful, iron ore prices are likely to come down from here. Steel reinforcement bar (rebar), has fallen 14% the current quarter to 2,265 CNY per mt ($365/ton) as of Friday, the lowest since at least 2003, according to data from Beijing Antaike quoted by Bloomberg.

Construction Falling

The construction sector has been hit particularly hard, as evidenced by the amount of land purchased for real estate development falling 31% in the first five months of this year and new construction starts slumping 16%, according to the National Bureau of Statistics.

The paper quotes Goldman Sachs saying about 35% of China’s steel demand is related to housing and construction-related activity. Led by construction, China’s apparent steel demand fell 4% to 302 mmt during the first five months of 2015, a reversal from 3% growth in 2014. Meanwhile, exports have surged further underlying the excess domestic inventory position.

China exported a record 10.3 mmt in January and shipments in the first five months of the year were 28% higher than the same period in 2014. At that rate, the country ships out more than any other single country produces, according to data from the World Steel Association; an untenable situation in the long run prompting widespread anti-dumping actions in Europe and the Americas.

No Quick Chinese Turnaround

To what extent profitability will play a role on China’s steel production in H2 remains to be seen. Most expect iron ore prices to fall, reducing supply-side cost pressures for steel producers even if it does little for demand. Reuters quotes Julius Baer estimates of $40 per mt as a possible low point for iron ore and Citi seems to agree saying, “We expect iron ore prices to reverse sharply and decline over the coming months,” averaging $51/mt this year and $40/mt in 2016.

While a few boosters are looking to infrastructure, such as Russian-Chinese pipeline projects and electrification as future drivers of increased steel demand, most are not seeing any increase in demand anytime soon.

Indeed, Li Xinchuang, CISA’s deputy secretary-general, is quoted by Bloomberg as saying in an interview this week: “Low prices will be with us for a long time. So will tepid demand and zero growth, or even contraction, in output.”

That doesn’t bode well for the rest of the world seeing high levels of Chinese steel exports, even when anti-dumping cases are successful in blocking direct Chinese steel exports to a particular market, there is still the effect of diverting that supply to other markets and driving down global steel prices as a result.

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Sources told Reuters that steelmakers in China were selling their products below cost and President Obama hosted a picnic at the White House with members of Congress ahead of a key trade vote.

Confirming What We Already Knew

Some Chinese steelmakers are selling their products abroad at a loss, traders and a producer told Reuters, as a group of global industry bodies urged governments to take action over rising shipments from China.

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Chinese mills had sold steel overseas at a loss of up to 200 CNY ($32) a metric ton and cut the export price of hot-rolled coil by 5% to $340-$350 per mt, free-on-board basis, this week compared to last week, traders and a producer in Hebei, China’s top steel-producing province told the news service.

These mills were also selling at a loss to the domestic market, the sources said.

“The domestic market is too weak to consume high output and our prices are competitive, so some mills are still keen to step up exports, hoping to ease high inventories and maintain market share,” said a senior official at a privately owned mill in Hebei.

Preesident Has Picnic With Lawmakers Ahead of Trade Re-Vote

President Obama hosted members of Congress yesterday for the congressional picnic amid a fierce trade debate on Capitol Hill.

This year’s gathering took place before the House was expected to hold a vote today to revive the president’s stalled trade agenda, and less than one week after Democrats killed a key part of the legislative package.

House Minority Leader Nancy Pelosi (D-Calif.) was in attendance at the picnic. The president has not spoken with her personally since she led the Democratic revolt against the trade bills.

The event is seen as an opportunity for the president to get face time with lawmakers in a low-pressure setting. That could prove to be important for Obama with the House set for a re-vote on fast-track trade authority and a measure to provide aid to US workers displaced by international trade.

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