Chinese Steel Peaks Too Early, Output Drops and Exports are Mills’ Only Recourse

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The statistics illustrate the dire state of the Chinese steel market only too clearly.

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Excess Chinese steel capacity has nowhere to go but export markets.

Crude steel output dropped in June by 0.8% from a year earlier while apparent consumption of steel for the first five months declined by 5.1%, according to Reuters. Meanwhile, steel prices are at their lowest in more than 20 years. In spite of weaker iron ore prices, large steelmakers’ losses on their core business more than doubled for the January-May period from a year earlier.

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Steel prices have been sliding as construction activity has remained weak, rebar futures on the Shanghai Futures Exchange have lost about 25% so far this year, on top of losing 28% across the whole of 2014.

Market Share at Risk

Steel mills have talked about bringing forward maintenance and refurbishment work this summer in an effort to curb the over-production and stabilize prices, but, so far, there has been little sign anyone wants to be the first to risk losing market share.

Rather, exports of steel products surged 28% to 52.4 million metric tons in the first six months of the year as mills dump excess production overseas. According to Reuters, CISA members (who comprise the top 100 mills) posted a loss of 16.48 billion CNY ($2.65 billion) for their steelmaking businesses in the June-May period, up from a loss of “just” 6.12 billion CNY ($984 million) for the same period last year.

The Chinese economy, in broad GDP terms, has been slowing. Depending on which numbers you look at (nominal or inflation adjusted) it is 5.8% or 7%. The inflation adjustment is a Beijing black box fudge factor and you can take it or leave it, but the underlying trend has been down earlier this year and is, at best, steady today.

Manufacturing, Construction Worse Off

Within that, though, manufacturing is suffering more than the wider economy. According to CNBC, Chinese industrial output for June rose a nominal 6.8% year-on-year, while last month’s retail sales climbed 10.6%.

The booming stock market in the first six months of the year will have contributed to that service sector GDP number and doubts must be raised over the near-term prospects for a stock market that was being propped up only by government intervention. Chinese stocks are still suffering from last week’s market shock.

If prices return to falling, as they surely would without Beijing’s life support, then both financial sector activity and consumer sentiment could suffer in the second half. Under such circumstances, an increase in steel demand seems even more remote and steel mill closures more likely. In the meantime, expect export markets to continue to be the destination of choice for unwanted production. If mills don’t mothball production and demand doesn’t pick up, it’s the only game in town.

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