Posted on 05 Oct 2015
China's economic slowdown is causing a serious supply glut in steel and other resources, putting downward pressure on prices. Overcapacity is upsetting the global supply-demand balance.
[PICTURE1]An executive of a Japan-based trading house that handles Chinese steel said Baosteel's capacity buildup occurred under challenging market conditions.
UBS Securities expects China's crude steel capacity to exceed consumption by 441 million tons in 2015. The supply-demand gap will grow to be nearly three times wider than it was five years ago.
Excess capacity
China accounts for half of the global steel production. It produced about 820 million tons of crude steel in 2014. Refineries in China were expanded due to increased investment in construction after the 2008 global financial crisis. The country's crude steel capacity stands at about 1.16 billion tons, up 60% over the last five years.
Growth in domestic demand has slowed in recent years due to sluggish real estate investment. China's crude steel consumption came in at 747 million tons in 2014, falling into the negative territory for the first time in about 20 years. With ever-increasing crude steel production peaking, the capacity utilization rate of China's refineries was about 70% on average, falling by about 15 points over the past decade.
To resolve excess capacity, Beijing urged local governments to curb unregulated capacity expansion in autumn 2013. The country aims to raise its capacity utilization rate to more than 80% by 2017 in its new plan, formulated this spring. UBS Securities estimates that China's crude steel capacity will peak at 1.17 billion tons in 2016. However, steel capacity will remain roughly unchanged and the utilization rate will drop to the 60% range.
Atsushi Yamaguchi, a senior analyst at UBS Securities Japan, said "it will be difficult to cut crude steel capacity substantially as refineries play a key role in creating jobs in some regions."
