Doubts are spreading why China's huge steel production capacity, which resulted in heavy stocks buildup, prices collapse and overall losses, has not been reduced versus the wide global output cuts amid the unprecedented economic woes?
World Steel Association said that China's crude steel output in April makes up 48.53% of global total production, and down merely 3.9% from a year ago; while in the same month, global output fell 23.6%, of this, output in Japan fell 43.6%, Korea down by 10.5%, EU off 48.6% and US dipped 53.4%.
1. China Maintains High Production amid Global Cuts
Mr Jia Liangqun chief analyst from Mysteel.com said "The world's big economies are all slashing output versus the stable production in China that's abnormal and reflects the limited effect of output cuts in the month."
Mr Xu Lejiang Baosteel Group president also said in a recent meeting that the cutback scale is insufficient compared to those in overseas countries around 70% to 80% of total capacity is still running.
Mr Shan Shanghua secretary-general of China Iron & Steel Association disclosed that large-scale steel mills in China are cutting output at the moment, with the cutback ratio of about 10% to 20% of their total capacity of which, Wuhan Steel trims 20% and Hebei Steel retires 10%.
2. Excessive Capacity Led to Wide Losses
The Ministry of Industry and Information Technology said last week that China's steel capacity kept at a high level and exceeds real demand by 25% to 30%. And the excess capacity would deal direct impact on China's steel industrial development in the large.
The view was echoed by another insider, who said the high production level would inevitably further deteriorate the loss due to the huge stockpiles, low demand and blocked export. And it would press down steel prices further as well.
Mr Xu said the resumed production has further widened the loss instead of bringing any profit. China's 72 large-and-medium-sized steel mills posted a combined loss of CNY 3.308 billion in the first quarter, and the overall loss would drag on in Apr. Losses are possible for whole 2009 amid the overall situation at home and abroad.
3. Healthy Liquidity Props up Steel Production
CISA has been attributing the high steel output to the fast reviving production of small mills. And the association said that mills ranking the top 50 in output resumption so far this year are medium and small mills with annual production below 5 million tonnes while big mills like Baosteel, Angang and Wuhan Steel are all controlling output.
Mr Jia said "These small mills still earn profit at the current price level, therefore, once demand shows sign of picking up, they restart production. And Mr Qi Xiangdong vice secretary general of CISA also said that 60% of steel mills are suffered loss at present, but there are still possible profit margins for private mini mills.”
Mr Yang Siming chairman of Nanjing Iron & Steel United Co said large and medium steel mills also have not exercised self restraint in capping production. And the sufficient bank loans resulted from stimulus packages and loosening monetary policy are the root cause for the difficulty in cutting output. He said that with bank loans available, steel mills would insist on production even if it means loss, since they have to retain their market shares.”
4. Local Governments Help Boost Steel Sales
Many provincial governments have taken steps to help boost local leading mills products' sales amid the withering demand. And Hubei has convened a matching meeting lately and organized over 300 local major steel consumers for a possible cooperation with Wuhan Steel Group. So far, the state-run mill has inked 5.04 million tonnes of steel contract with local big steel users.
An insider warned that "It is a good way to solve the current problem, and many mills have taken similar measures. However, market competition would not exist any longer if every province takes such move, and it would be unfavorable for steel market circulation in the long run."
(Source: National Business Daily)
