Steel sinks as China’s growth slows

Crude steel production in China will drop by 23-million tonnes next year, according to the nation’s leading industry group. That’s equivalent to more than a quarter of the United States’s annual output.

Supply by the top producer could drop 2.9% to about 783-million tonnes from 806-million tonnes in 2015, the China Iron and Steel Association predicts. The slump will be driven by a worsening downturn in local demand and as mills encountered stiffer opposition to exports, the association’s deputy secretary general, Li Xinchuang, said in an interview this week.

“You can’t find any bright spots,” Li said in Shanghai, citing the weakness of Asia’s largest economy. “Property developments used to enjoy annual growth of 20% and now, at best, it is 5%. Infrastructure investments haven’t taken off due to lack of funds despite of all the planned numbers of projects. Manufacturing investments have also dropped like a stone.”

China’s mills, which produce about half of worldwide output, are battling against losses, oversupply and sinking prices as local consumption shrinks for the first time in a generation.

The fall-out from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. The Shanghai Baosteel Group has forecast that China’s steel production could eventually shrink by 20%.

Li’s estimate of 783-million tonnes of Chinese production compares with US’s supply of 88.3-million tonnes in 2014, according to data from the World Steel Association for 2014, the last complete year of figures. That year, output in China was 823-million tonnes.

Steel demand in China is likely to slump to about 654-million tonnes in 2016 from 668- million tonnes this year, Li said. Iron ore imports are also projected to drop, sliding to 920-million tonnes in 2016 from about 930-million tonnes.

The oversupply of steel in China is so acute that David Humphreys, a former chief economist of Rio Tinto, the world’s second-biggest iron ore miner company, said the country would do well to demolish its unneeded mills.

Steel extended its losses on Wednesday. Futures for reinforcement bar, a benchmark product that is used in construction, fell as much as 1.1% to $271 a tonne in Shanghai, a record low. On Tuesday, iron ore with 62% content delivered to Qingdao lost 4.5% to end at $45.58 a dry tonne, a four-month low, according to the Metal Bulletin.

Producers in China are taking losses of about $50 on every tonne, the commodity trader, Noble Group, said last week, warning that output will probably tumble. At current steel and raw material prices, China’s steel mills have negative margins, the company said.

Iron ore will extend its declines into 2016 as weakening steel output hurts demand and the world’s biggest suppliers continue to raise production, according to Humphreys, who said China would do well to demolish unneeded mills. He maintains steel production needs to fall.

“There’s about 300-million tonnes of surplus capacity in China that needs to be not just shut down, it needs to be eradicated, it needs to be bulldozed,” said Humphreys, who was at Rio for eight years until 2004.

Iron ore is heading for a third year of losses as the largest suppliers, including Rio and BHP Billiton, remain intent on raising low-cost production to boost sales and China’s steel industry grapples with shrinking local demand and record-low prices, which are crushing profits.

With many mills in the top producer suffering increased losses, bigger cuts to steel output will occur next year, which will hurt iron ore, according to Citigroup.

“We’re looking at what’s likely to be a fairly soft year for demand and, in the absence of any dramatic changes on the supply side, yes, I think it will remain a year of weakness,” Humphreys said from London, referring to iron ore.

“There’s a prospect of further declines in steel demand and the capacity to grow exports is almost nonexistent. It does point to the need for some cutbacks [in steel output],” he said.

Tuesday’s ore low of $45.58 a dry metric tonne is the lowest price since July 8, when the raw material reached $44.59, a record low in daily price data dating back to May 2009. Futures in China and Singapore sank on Wednesday, with the contract on the Dalian Commodity Exchange at a record low.

Rio Tinto has defended its strategy of adding output. Andrew Harding, Rio’s iron ore head, said this month the company will keep defending market share and, if it moved to cut production, volumes would simply be taken up by less efficient miners.

Humphreys said the major producers’ approach made sense as they sought to reduce costs and deal with weaker prices.

“The response quite reasonably is, why would you cut back if you’re a profitable producer?, which they are,” he said. “They certainly see it as the responsibility of the high-cost producers to balance the market.”

Crude-steel output in China surged more than 12-fold between 1990 and 2014, and the increase was emblematic of the country’s emergence as Asia’s largest economy.

Output probably peaked last year at 823-million tonnes, according to the China Iron and Steel Association. The country produced 675-million tonnes in the first 10 months, 2.2% less than the same period last year, the statistics bureau said last week.

The record flood of steel that mills in China are pushing on to global markets has stoked rising trade tensions in Europe and the US. Exports fell 20% to 9.02-million tonnes last month from September, customs data showed.

“China is not going to come storming back,” Humphreys said. “The only means by which China is able to sustain these levels of production at the moment is by increasing its exports [but] there’s no real scope to grow exports either.” – With assistance from Jasmine Ng © Bloomberg

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