Tuesday, June 08, 2010

More steel capacity cuts

Hot on the heels of the recent announcement by ArcelorMittal of possible steel production cutbacks, Bloomberg are reporting discussion of cuts in China:

Chinese steelmakers are likely to cut production in the third quarter because of “weak” demand from auto and appliance makers, according to the nation’s second- biggest mill.

Slower demand may prompt smaller makers to default on iron ore contracts in the third quarter, Baosteel Group Corp. Chairman Xu Lejiang said today at the Bloomberg

“Many steelmakers will cut production or carry out maintenance in the third quarter,” Xu said. “Steel demand from automotive and home appliance industries has become weak. Iron ore costs will be the highest in the third quarter.”

Mills face a “difficult” second half, Xu said last month as concern increases that measures to curb speculation in the property market will trim demand. Baoshan Iron & Steel Co., Baosteel’s publicly traded unit, cut prices on June 4, the first time in eight months.

“Many Chinese steelmakers are either losing money or close to losing money,” Michelle Applebaum, who runs a steel-research firm in Highland Park, Illinois, wrote in an e-mail today. “The timing on iron ore price increases in the coming months is very poor for many of China’s higher cost smaller steelmakers.”

Read the full report at Bloomberg Business Week.

Steel prices have increased rapidly during 2010 and have only weakened very recently in Asia. Steel prices remain high in Europe and North America. Steel Mills appear to be reacting rapidly to a threat of prices collapsing by taking capacity out of the market to align with lower forecast demand. A proportion of the recent price rises was based on increasing iron ore costs. One of the moves by the iron ore produces was to insist on shorter fixed contracts, presumably to give them scope to increase prices more frequently. If demand is falling it may turn out to be a move they will regret.

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