Posted on 23 Feb 2016
China's fail on steel sector reform is a poor omen for the economy
China has failed to
shut-down outdated steel mills and will not meet its 2017 target for
overhauling the sector, according to Europe's peak business camber, as
analysts believe the recent rally in the price of iron ore will not
last.
The iron ore price has surged 11 per cent over the last week
to above $US48 a tonne, but one Chinese industry insider said this was
due to short term factors, rather than any sustained pick-up in demand.
He
said steel mills around Beijing had increased production ahead of the
National People's Congress, which begins on March 5, as they will be
forced to shut-down lines to ensure blue skies for the week-long session
of China's rubber-stamp parliament.
"It will not take long,
maybe a week or two, but steel prices and the price of iron ore will
start falling again," said the source who asked not to be named.
China's
steel sector, which accounts for half the world's production, has been
wracked by falling demand and over-supply in recent years, a situation
unlikely to change according to the European Chamber of Commerce.
In
a report published on Monday, the Chamber said little progress had been
made in meeting the government's goal of shutting down 80 million
tonnes of steel-making production by next year.
It said 31 million tonnes was eliminated in 2014, but this was not replicated last year.
The Chamber singled out the steel-making province of Hebei, which borders Beijing, as the main problem area.
Under
the government's plan 75 per cent of the cuts were to happen in Hebei,
but the Chamber said these had failed to eventuate, meaning the 2017
target would not be met.
"China has not followed through on the
attempts it has made over the last decade to address overcapacity. This
has led to a further deterioration of the problem," said the Chamber's
President, Joerg Wuttke.
"Without a sustained effort to address it
now, overcapacity may well seriously impede the effectiveness of
China's economic reform agenda."
The chamber said the
lack of reform in sectors like steel, glass making and cement was making
China's debt problems worse and exacerbating trade tensions with Europe
and the United States, which regularly accused Beijing of dumping
manufacturing goods onto the world market.
China exported a record 110 million tonnes of steel in 2015, up 17 per cent from the previous year.
The
flurry of exports came as China's overall steel production declined by
2.3 per cent to 804 million tonnes in 2015, the first annual decline in
three decades.
The tepid demand for steel in China is mainly due
to the weak property market in regional areas which are suffering from
an over-supply of apartments.
Xu Xiangchun, the chief
information officer at research firm, MySteel, has been surprised by
the recent iron ore rally and believes it is mainly speculators betting
on increased steel demand after recent strong credit figures.
"I think this is just speculation, as I don't see any improvement in demand," he said via phone from Beijing.
"None of the majors are reducing production and there remains a big oversupply in iron ore the market."
He
believes restructuring of the steel sector will be slow as provincial
governments remain strongly opposed to the loss of tax revenue and local
jobs.
"This year will be another difficult year for the steel mills, with very low profitability," he said.
