Thursday, May 26, 2005

Chinese Steel Production Giving Cause For Concern

The following article appears in Meps International Steel Review

The recent weakening in China’s domestic steel prices has done little to put a brake on the strong growth in national production. According to the International Iron & Steel Institute, China produced 28.1 million tonnes of crude steel in April. This was an increase of 25.4 percent over the figure last year. For the first four months of 2005, output was up by over 20 million tonnes, or 24.8 percent year-on-year, at almost 106 million tonnes.This must be sending shivers down the spine of all other Asian producers. April’s performance is equivalent to an annualised production rate of 342 million tonnes and way ahead of all but the most bullish forecasts for this year. Indeed, the Chinese steel industry itself has forecast 2005 output of no more than 322 million tonnes. Iron ore suppliers say there is no sign of any slowdown in Chinese bookings, indicating mills’ production plans remain in expansion mode.Chinese exports of steel in the first quarter of this year, at 8.06 million tonnes exceeded imports of 6.36 million tonnes by 1.7 million tonnes. The surplus was entirely due to overseas shipments of semi-finished products, though it was noteworthy that net receipts of finished steel narrowed to less than one million tonnes in the period.Most recently reported figures indicate a sharp drop in Chinese imports in the first four months of this year, and it seems quite likely that China will become a net exporter of finished steel at some point in the near future. This has got other market players worried. If China were to develop an exportable surplus running into many millions of tonnes, it could swamp the steel markets in east Asia and further afield, damaging the business opportunities available to other suppliers.It is true that the Chinese steel industry is required to import expensive iron ore because its domestic supplies are of mediocre quality. Moreover, it has inadequate energy resources. However, the same can be said of all the other major East Asian producing nations. But they do not have the advantages of substantial coking coal reserves and very low labour costs.The dangers of global oversupply as China racks up its production are not being over-exaggerated. There is much talk about a possible revaluation of the Chinese currency. This would have only minimal impact on the cost of steel in US dollars. Imports of raw materials would be cheaper to offset some of the higher costs of domestically produced ore and coke. The Chinese steel industry is much more efficient now. New steelmaking capacity is "state of the art" design.The Chinese government has been trying to curb the excesses of capacity growth within the steel sector for several years with only limited success. China was the saviour of the global steel sector during the early years of the twenty first century - giving a boost to demand. Could it be the scourge of the industry by the end of the decade? This is a real possibility if production potential is allowed to grow unchecked.

Source: MEPS - International Steel Review

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