China Keeps Out the Competition

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It’s an oft-cited fact that the steel price and level of demand is driven by a burgeoning need from China — yet in a recent conference speech, Xiong Bilin of the Chinese NDRC is reported to have said that China has 500 million tons of steel producing capacity and supply exceeds demand. In the same speech, the NDRC went on to explain the reason the authorities have been blocking the involvement of foreign steel companies in the building of new facilities in China: to try to head off a massive excess of production capacity.

For environmental reasons as much as anything, China does not want to become the steel producer to the world. But in a position very similar to the fears voiced by governments here when Asian mills first started buying into western mills in the 1980s, the NDRC also mentioned that the major domestic mills have social responsibilities (meaning in this case they provide lots of employment) and they probably don’t want drives to efficiency to be accompanied by mass layoffs.

Most of the world’s majors such as Arcelor Mittal have been trying to buy into existing Chinese steel companies, but have found that their attempts to take more than a minority stake have been thwarted when it goes for regulatory approval. What goes around comes around. Perhaps we are seeing the first signs of maturity in the Chinese market as investment in primary industries slows and the country’s production capability moves up market. Let’s hope that brings some stability to commodities in the years ahead.

–Stuart Burns

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