Spot steel prices have been rising in China driven by an expectation that supplies will be tighter in the fourth quarter and that mills will be pushing up prices. The country technically still suffers from over capacity but in a bid to achieve year end energy efficiency targets, Beijing has instructed 30 steel mills in Hebei province, home to many of China’s major steel producers, to cut output by up to 70% between now and the year end. Another 18 were told to close down for up to a month.
China’s installed capacity is believed to be about 740 million tons and the country is expected to make about 600 million+ tons this coming year. The government has long wanted to consolidate the industry into the hands of a few (largely state owned) champions but this is not the way to achieve that ambition. Judy Zhu of Standard Chartered Bank is quoted in a Reuters report as saying, “If you really want to remove capacity, you have to raise electricity prices and raise their (the mills) production costs to make them loss making,” adding that the orders in Hebei would shutter only 14.4 million tons in capacity, just 2.4% of countrywide production. Hebei’s production cuts follows moves by several other provinces, such as Zhejiang and Shangdong, to cut power supplies to steel mills to save energy, sparking a 16% surge in steel prices on the Chinese domestic market since July.
Even so, actual cuts may be less than anticipated. Apparently some producers simply switch from power supplied from the national grid to generating their own power. If the government is serious about capacity reduction the rest of the world will welcome the news. With so much over capacity China could have exported more than the current entire production of the United States, that she didn’t says more to the effectiveness of anti dumping threats around the world than to restraint on the part of steel producers.
The Chinese government is going to have to be more creative than simply issuing edicts that production must be cut. Smaller steel producers in particular are pretty creative in getting around regulations and continuing to produce. If prices rise as expected, the incentive for them to circumvent directives and continue producing will be that much higher. In a country that is already over producing that is bad news in the medium term as speculative stocks will build up in the supply chain. Meanwhile apparently steel producers share prices are on the rise as the market notes that a 2.4% drop in production coupled with a 10-20% hike in prices and falling iron ore costs equates to much higher profits. Looks like Beijing is on the steel makers side after all.