An interesting statement caught my eye this week ” Steel is on edge and the global industry is cutting back hard, hanging on for either a budget blast from China, new credit for vast Middle Eastern building schemes or resurrection of the US auto industry.
We would contend that steel producers may be hoping one of these drivers will contribute to a pick up in demand but gradual pick up is the best that can be hoped for. In reality, if steel producers are hanging on for one of these drivers to bring a turnaround in its fortunes they should turn over the keys now.
Steel prices, on the other hand, are dependent on something different, namely China cutting excess capacity. We have written elsewhere about the anti dumping action producers in the US and Europe are taking against China, so we won’t go in to that subject here. The fact remains China has built massive excess production capacity which employs a lot of people. The government estimates that China’s annual production is about 100 million tons more than it should be, a figure equal to the whole annual output of the steel industry in the United States.
The issue facing the world’s steel industry is not whether China is producing steel profitably or whether subsidies and support are helping the Chinese producers. The issue is the rest of the world is running at well below capacity (43.3% in the US according to the AISI) and imports of some grades into the US and Europe from China are running at record levels. Even on the domestic market steel is being produced for which there is not a buyer. According to some reports Chinese steel production actually grew in February by 4.9% even as exports fell and prices remained at half their level a year ago.
Common sense prompts the question if the rest of the world can cut back capacity then why can’t China? The answer is there are some 700 steel companies in China feeding some 7000 downstream processors. China lacks the market discipline that exists in North America or Europe where a handful of producers can act in unison to balance production with demand. In China, if one or two producers cut back, the others see it as an opportunity to grab market share. The government has tried encouraging producers to consolidate. It has tried forcing more polluting less efficient plants out of production, and it has largely failed. Faced with concerted anti dumping actions around the world may be it will realize it has to take more drastic action to rationalize production ” or may be it will just dig its heals in at what it sees as foreign interference, as is so often the Chinese way.