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Chinese steel mills to breath fire for quite some time
A historic saying from Isaac Newton that “What goes up must come down” seems to be proving right for the fortunes of steel mills worldwide. Chinese appetite for steel in 2003-2008 period for building infrastructure, setting up manufacturing plants etc had helped in dramatic rise of steel prices filling the coffers of overseas steel mills and miners propelling them to expand their capacities in greed to maximize their profits. But no one had envisaged that the dragon would slow down so soon and start belching fire to push global steel industry to knees. China's mills, which produce about half of worldwide output, are battling against oversupply and sinking prices in domestic market as local consumption shrinks for the first time in a generation. Steel makers worldwide are watching closely that how much production cut happens in China to arrest the slide in global steel prices to ease their miseries.
Let's look at some of the key issues
Chinese Steel Consumption
The official GDP growth, which had been above 10%, has slumped to about 6.9%, a six year low as Chinese government has decided to switch to new norm of 7% by focusing an economy that is more consumer led moving from an over reliance on exports and government led investment in infrastructure and manufacturing. While many argue about inaccuracy in 6.9% growth citing much more decline in many other indicators like rail freight volumes, power generation, coal consumption etc, it is certain that the old story is over and we will never see such numbers. Moreover, the power center in Beijing has decided to move away from infrastructure development and manufacturing led economy to “consumption” driven economy wiping out even the remote hopes of recovery in old engines. This has led to a serious decline in steel consumption in China which has peaked in 2014 and as per official figures the same has declined by almost 6% in the first 10 months of 2015. According to the China Iron and Steel Association, apparent steel consumption in China, the world's biggest producer and consumer, fell 5.7 percent to 591 million tonnes in the first 10 months of the year. The steel consumption has been hit badly by woes in construction related steel demand as the property boom is over and Chinese government has reduced investments in building infrastructure. In past it accounted for more than 60% of the steel used in China
Chinese Steel Production
While, BaoSteel has forecast that China’s steel production may eventually shrink 20 percent, according to latest release from world steel China has produced 672.842 million tonnes of crude steel in January to October 2015 period down by just 1% YoY as compared to 681.902 million tonnes in January- October 2014. This has led to surplus availability of finished steel with Chines steel mills as the domestic consumption has dwindled resulting in massive surge in exports.
Chinese Domestic Steel Prices
Steel prices of various steel items in Chinese domestic markets continue to move down every week without any end in sight due to shrinking demand amid huge glut on production side. We all remember that before the financial tsunami in July 2008, steel prices were at all time high all across the globe. SteelGuru started its pricing service on July 1st 2008 and developed some indices with base of 10000. Currently China’s Long Product Price Index CLPPI stands at 3560 down by 64% and China’s Flat Product Price Index CFPPI at 3140 down by 68% meaning that current Chinese domestic prices are only at 36% and 32% for longs and flats as compared to peak levels. The current Chinese domestic prices are at extremely low levels and after taking out 17%VAT, EX mill realization is just about to USD 225-250 or INR 15000-16500 for most finished steel items
Steel Exports from China
After a million tonne spike in steel exports in September to11 million tonnes, overseas shipments from China returned to normal level of about 9.02 million tonne in October 2015. That was the lowest figure since June and below the monthly average this year of 9.21 million tonnes. Although, many believe that the MoM slump in steel exports in October last reflects rising trade frictions for Chinese products, export volumes were impacted by recent growth slowdown in emerging markets, which had become fast-growing markets for Chinese exports in recent times. But the fact is China remains on track to export almost 110 million tonnes of steel in 2015. The Chinese steel mills are very aggressive on export front and Chinese steel has reached more than 210 countries in 2015. As the Chinese steel mills get equal or more realization on exports they have been very aggressive on securing export orders at very low FOB levels, off course adopting chrome route in most cases. The erosion in Chinese export prices in last 12 months of almost 40-50%
Rebar – USD 250 per tonne FOB China (-41% YoY)
Wire Rod - USD 265 per tonne FOB China (-38% YoY)
Plates - USD 260 per tonne FOB China (-44% YoY)
HR - USD 250 per tonne FOB China (-47% YoY)
CR - USD 285 per tonne FOB China (-47% YoY)
HDG - USD per tonne 360 FOB China (-40% YoY)
PPGI - USD per tonne 430 FOB China (-37% YoY)
Bottom Line of Chinese Steel Mills
According to CISA, listed Chinese iron and steel companies have plunged to heavy losses during the nine-month period of the current year. 23 out of the 35 listed steelmakers have reported losses during the nine-month period from January to September this year. At current prices almost all Chinese steel mills are bleeding.
Production Cuts in China
While the call for production cuts is growing louder every day, only few large companies shave undertaken real measure, mostly from the private sectors. As we are aware about the structure of Chines steel industry, which is besotted with thousands of small province owned steel mills, large scale pruning remains a big challenge due to social issues although currently a growing number of steel products have fallen below margins at many mills despite tremendous cost cut efforts, and now all efforts are approaching the limits. It is estimated that China has almost 300-400 million tonnes of overcapacity and thus production cuts of even 100 million tonnes is not going to cut ice, which is quite improbable considering the social issues involved for state owned mills.
Tough Times Ahead for Steel Mills Worldwide
Although steel mills worldwide would like to believe in the story of production cuts as how long one can bleed, but the situation is scary. During a recent visit and discussions with top analysts, it has emerged that restructuring of Chinese steel sector is inevitable but the time lines are suspect with views of 2 years, 5 years, 10 and even 20 years. The situation is much worse than one can imagine. This means that there is no chance of recovery in steel export prices from China in next 10-12 months. Moreover, the recent rout of about USD 15 is likely to give elbow room of more than USD 20 to Chinese steel mills to cut their prices further which will keep all the steel mills globally under severe stress.
Source: Market Intelligence Services PS 14