Date
23 April 2017
Steel price recovery has shored up the bottom lines of Chinese steel mills, but it is adding to a structural problem within the industry.
Steel price recovery has shored up the bottom lines of Chinese steel mills, but it is adding to a structural problem within the industry.

Don’t get over-excited about steel price rebound

Commodity prices have rebounded as investors expect global economic growth to pick up steam. China’s iron ore price index surged nearly 90 percent in past one year and prices of steel products have also jumped.

The iron ore price index stood at 319 points on February 14, up 89.9 percent compared to a year ago.

Stronger product prices helped boost steelmakers’ bottom lines. The industry posted a total profit of 33.15 billion yuan during the first 11 months of 2016, compared with over 50 billion yuan loss in the same period the previous year, according to data from the China Iron & Steel Association.

That said, China’s steel consumption through infrastructure projects and other sectors has yet to stage a notable recovery.

Speculation-driven gain in prices, while benefiting the industry in the short term, may eventually turn out to be a curse as higher prices would discourage steel mills from phasing out excess capacity.

As the steel industry has been grappling with excess capacity for years, the State Council unveiled a set of guidelines last year, vowing to phase out 100-150 million metric tons of excess capacity within five years.

However, China’s steel production has actually increased by 36.59 million metric tons last year, according to a joint research of Custeel and Greenpeace.

Obviously, steelmakers ignored the overall policy direction.

As a result, several government agencies have issued a joint notice calling for stabilization of the steel market, a move that underlined the fact that China’s steel overcapacity has yet to be resolved.

The notice was issued by the National Development & Reform Commission, the Ministry of Industry and Information Technology, General Administration of Quality Supervision, Inspection and Quarantine, China Banking Regulatory Commission and China Securities Regulatory Commission.

Authorities pledged to deepen efforts to eliminate excessive steel capacity and shut down inefficient mills.

However, producers are unlikely to heed the call as long as it is profitable for them to churn out more steel products.

Now, we come to this question: Can the excess-capacity problem be resolved by boosting exports?

The answer: Well, not really!

That is because Chinese steel exports have encountered anti-dumping charges in various nations.

The US Commerce Department announced early this month, after concluding anti-dumping and anti-subsidy probes, that it would impose punitive tariffs ranging from 63.86 percent to 190.71 percent on Chinese stainless steel products. 

Apart from that, the European Union, as well as India, Indonesia, Thailand, Malaysia and other nations have also filed anti-dumping complaints against Chinese steel products.

Given this situation, China, for its own good as well as to avoid further trade disputes, needs to put in more efforts to slash excess capacity in its steel sector.

As regards steelmakers’ prospects on the stock market, I believe further upside in steel prices would be limited, and so would the equity prices. Investors would do well to bear this in mind.

This article appeared in the Hong Kong Economic Journal on Feb. 17

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

HKEJ columnist

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