Steel Production in China Still Not Under Control, Prices Falling

Steel prices in China continue to fall in the face of plunging raw material cost inputs and a depressed construction sector. Even though China closed 31.1 million tons of steel production capacity last year, higher than the 27 million tons expected, the sector is still suffering from chronic overcapacity. Worse, the low hanging fruit in terms of obsolete and most-polluting plants have already been closed. Hebei province, the country’s biggest steel-making region, has closed as much as 15 million tons of steel production capacity last year, but according to Reuters only aims to shut 5 million tons this year.

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Beijing is trying to encourage more rationalization and has not only imposed stricter air-pollution control limits, but removed export tax rebates on certain grades of boron-containing steels to dissuade producers from simply shifting excess production onto export markets. So far their efforts have had little effect, and rationalization has largely gone absent.

Inventory remains high and prices tracked by MetalMiner’s domestic price reporting service have continued to fall. Melinda Moore, analyst at Standard Bank is quoted by the FT as saying demand for steel has effectively fallen 15-20% from December’s levels.

With domestic growth slowing and particularly little sign of life in the construction sector, demand is not expected to pick up substantially in 2015. Meanwhile, iron ore and coking coal prices continue to fall. Iron ore hit $63.30 per ton this week for Australian-origin supplies according to the FT, the lowest level for 5-1/2 years and with the big three miners continuing to chase the market down with ever-rising production, steel price support will not come from cost inputs. Indeed, Goldman Sachs lowered its iron ore forecasts to $66 this year, $61 next year and $60 in 2017 and 2018, last week according to the FT, saying the adjustment required to balance the market was “far from complete”.

Chinese steel will represent an opportunity for western consumers this year, particularly in the US with a stronger dollar, but will continue to be a threat to western steel mills fighting for market share, in spite of Beijing’s efforts to rein in exports.

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