November 20, 2008

Chinese steel sector fighting overcapacity – UBS

It is reported that different from the mainstream viewpoint that the slowing fixed asset investment is set to solve overcapacity problem, Mr Tang Xiaobo analyst and associate director of UBS used "fragile, cautious handling" to describe the 2008 outlook for China's steel industry in its report and pointed out overcapacity remained a big risk.

Mr Tang held neutral to the steel industry development in following 12 months, with M&A as the theme and price rise feature. Meanwhile, he said rising material cost, iron ore mainly, and freight rate, easing export and new capacity release are three concerns. He predicted overcapacity to protrude in H 2 2008.

Mr Tang disapproved slowing fixed asset investment can help ravel out overcapacity for
1. It needs some 16 to 24 months for invested steel to come on stream
2. The capitalized cost is on the decrease. A 4 million tonnes per year long flow line costs CNY 5000 per tonne in 2001-2005 and CNY 4500 per tonne for the moment
3. Efficiency of production facility is advancing and technological upgrade of the mills can lead to bigger output.

According to Mr Tang macroscopic risk facing the steel industry is slowdown in the world and China's economy; from perspective of the industry, steel price hike is short for offsetting raw materials' cost rise.

(Sourced from MySteel.net)