One may think that China’s steel industry could hardly be in a worse place.
Half the industry is losing money in spite of falling iron ore and coking coal costs and a reduction in domestic power costs all aiding steel producers on the supply side. Even among those that did not lose money in the first half, margins are said to be razor-thin and banks are reported to be cutting credit lines and presenting difficulties in rolling over loans, according to China Iron and Steel Association (CISA) comments posted by Reuters.
Too Much Production
It’s a toxic mix of overcapacity and poor demand that is causing the industry the most trouble.
The residential construction sector is undergoing a painful adjustment as a previous boom turns to something close to a bust, Reuters reported. Investment in real estate grew by just 4.6% in the first half of this year; a year ago it was running at just over 14%. The collapse of the stock market and corresponding impact on confidence could even see that turn negative in the second half.
Construction, though, is just one part of a broader slowdown in fixed asset investment (FAI) in China. Despite all the talk of government infrastructure spending, FAI growth has decelerated to 11.4% from 17.3% over the same period a year ago.
Steel producers outside of the country are looking on with concern.
Nippon Steel & Sumitomo Metal advisor Hiroshi Tomono is quoted by Bloomberg as warning it will take a long time for overcapacity to be resolved and the global steel glut is likely to increase in the short term.
The Overcapacity Problem
Chinese steel exports have mushroomed this year. Reuters reports they totaled 52.4 million metric tons in the first half of 2015, up by almost 28%, or around 11.4 mmt, over the same period of 2014. The article makes the point that monthly exports are running at an annualized pace of around 107 mmt. That’s more than last year’s entire production in the US, or, worse yet, close to the combined output of the whole of North America.
Macquarie Bank is quoted as saying that the global steel outlook is so negative that “we are probably not too far off of a global industrial recession (though not an economic one).” Whether that proves to be the case or not, steel producers are in for a rough time, as excess Chinese production continues to weigh on global steel prices either directly, as imports, or indirectly as challenging export markets.
Either way the effect is going to be negative until overcapacity in China is tackled head-on and life for Chinese steel producers looks set to get even tougher.