Posted on 09 May 2016
China's steelmakers are raising output once again as price increases promise higher profit, threatening to derail the sector's recovery and hindering Beijing's attempts to rid the industry of loss-making enterprises.
Baoshan Iron & Steel parent Baosteel Group this spring began a trial run of full-stream steel production, from the blast furnace to finished materials, at a state-of-the-art mill on Donghai Island in Zhanjiang, Guangdong Province. The factory will put out 10 million tons per year of high-grade steel for use in automobiles, growing the company's competitiveness even as it closes aging facilities elsewhere. Materials produced there are seen selling for 10-20% less than products from major Japanese manufacturers. Exports are expected to begin as soon as September, when test operations will conclude.
The new plant is a boon to the local economy, employing several thousand people on an island where most residents earn their living in the fisheries industry. "This bridge, roads and apartment buildings have all been built for the mill," says a local resident.
Some 2,000km north, in Tangshan, Heibei Province, a different sort of revival is taking place. A number of small and midsize steelmakers clustered in the area are resuming production after recent halts. Employees at midsize producer Tangshan Songting Iron & Steel were called back to work in April, after the company shut its doors amid a shortage of funds at the end of 2015. Anger over unpaid wages led several hundred workers to occupy the roof of the company's office building at one point. With back pay promised, however, production has resumed. A number of other companies are following suit, Chinese media report.
Short-term gain
The increase in output does not mean demand has recovered from its severe slump. Rather, Baoshan and other leading steelmakers have since February started hiking prices to spur a market recovery. Prices on core steel products are growing 5-10% per month, even as the cost of iron ore continues to fall, giving profit margins a hefty boost.
Major steelmakers' January-March earnings, released in April, showed steep year-over-year declines in both profit and sales, along with a good deal of red ink. But they nevertheless indicated improvement over the fourth quarter of 2015. How serious China's government is about driving so-called zombie enterprises out of the market, as Premier Li Keqiang resolved to do at the end of last year, is up in the air.
The Organization for Economic Cooperation and Development met April 18 to discuss oversupply in the global steel market. Zhang Ji, China's assistant minister of commerce, denied that government production subsidies had led to the glut, offering an impassioned 30-minute defense at a press conference following the meeting.
Yet economic figures are not on his side. China's crude steel exports exceeded 100 million tons for the first time in 2015. Enormous subsidies from regional governments kept otherwise unprofitable enterprises afloat, flooding the market with cheap steel and chilling the global industry. "Bringing China into OECD talks might help resolve the problem," an executive at a Japanese steelmaker said before the OECD meeting. But those hopes were dashed in short order.
Long-term losses
The current steel market resurgence is not expected to last long. Business conditions will likely darken once more as zombie enterprises come back online, a Baoshan official said.
Heavy speculation in steel futures is stirring further uncertainty. The value of trading on construction-grade steel bars in late April hit 600 billion yuan ($92.3 billion) multiple days in a row, surpassing equities trading on the Shanghai and Shenzhen stock exchanges combined. The collapse of the stock bubble last year left vast amounts of capital seeking new targets. Those funds have since flooded into the commodities market, at one point raising the price of steel bar more than 50% above its level at the end of 2015.
China's steel demand will fall 4% from last year to 645 million tons in 2016, the World Steel Association predicts. If speculation and production hikes divorced from actual demand continue, it will be only a matter of time until supply and demand fall out of balance again.
This year will be a decisive one for China's push toward structural reform, said Liu Zhenjiang, secretary-general of the China Iron and Steel Association, in April. Yet as far as the steel industry is concerned, the latest round of so-called reforms could easily end in another set of empty promises.
