Chinese Steel Production Set to Collide With Rest of World

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China has had its share of trade disputes with the rest of the world over the years, and we could be in for more of the same.

As Reuters reported this week, according to the China Iron and Steel Association (CISA), profits at China’s steel mills fell by 96 percent in the first half of 2012 compared with the year before.

The news service reports many mills are caught between a rock and hard place as steel prices dive just as expensive upgrades commissioned during China’s decade of booming steel demand are coming online.

The industry as a whole earned 2.385 billion yuan ($374 million) in the first half of the year, a 96 percent fall for the first half of the year. Meanwhile, the sector is struggling with $400 billion of liabilities, raising financing costs by 37 percent.

In a country where steel is such a powerful lobby group and so key to the nation’s employment prospects and self-esteem, Beijing is not going to stand by and allow the industry to suffer.

For Western producers, one possible development has some attractions. CISA has appealed to the government to restore a value-added tax rebate on some high-end steel products purchased from domestic steel mills by plants that usually rely on overseas suppliers, hoping this will help alleviate the domestic supply glut and reduce imports.

Asian steel producers are not so enamored by the move, as they are the primary suppliers of these higher-grade steel products, but almost any development aimed at reducing pressure on Chinese mills to boost exports is to be welcomed. Faced with chronic over-capacity and a soft domestic market, the supply chain has been backing up for months.

Iron ore stocks have swollen to almost 100 million tons, while steel products inventories at major mills rose to 12.45 million tons as of July 20 — up 46 percent from the start of the year and 36 percent higher than a year earlier. Reuters quotes traders who say stockpiles of steel products in major Chinese cities have surpassed 15 million tons; apparently enough to build around 350 National Stadiums in Beijing, the iconic center piece of China’s 2008 Olympics.

Worryingly though, China’s exports have already mushroomed to 27.26 million tons in the first half, the highest for a six-month period since 2008, and although CISA has urged mills to rationalize capacity, none seem willing to be the first to do so; possibly hoping others will close capacity first, or possibly believing demand will come back.

With massive over-supply, falling domestic prices and a government unwilling to enforce re-structuring, the scene is set for dumping of excess inventory overseas and a rise in trade disputes with more responsible trade partners.

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