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Is Chinese Steel Production About to Spring Back?
Recently released data shows a slight increase in Chinese steel production for the first 9 months, leading to speculation that demand for imports of coking coal will also rise. But could this conjecture be too premature? China Coal Report has more.
The problem however, is many Chinese steelmakers have become notoriously difficult to extract money from as banks continue to tighten up credit controls.
“The rumours about the review of import licences by the new government are just not going away,” a China-based trader told Energy Publishing. “The government wants to marginalise the number of people who have import licences to try and get fewer players in the game so they can exert more control.”
“The trouble for those who have licences is those who haven’t used them in the last 12 months now stand to lose them and those who have used them have copped some major losses by doing so.”
But if you face the risk of losing your licence, you would have to think most are going to have a go at bringing in enough imports to justify keeping it.
“Those selling to Chinese traders and end-users though are being asked if they will accept payment 90 days after delivery because the buyers are having so much trouble getting Letters of Credit. It’s a big risk a lot of smart people are not prepared to take which leaves those who would be doing the buying without anyone to buy from.”
It is a quandary for Chinese steel makers desperate to import coking coal and iron ore before November 8 when the new administration takes power and any import licence review can begin.
It is also a quandary for the government – both existing and incumbent – as the Central Government’s stated aim has been to reduce steel over-capacity throughout the country. It must be added though, to little success so far.
World Steel Association data released recently (October 22) reflects crude steel production figures released earlier this month by China’s National Bureau of Statistics. Both data sets shows crude steel production in China in the first nine months of the year totalled 542.34Mt, an increase of 9.07Mt year-on-year (1.7%).
Production in September was 57.95Mt, an increase of 0.6% or 350kt y-o-y. Goldman Sachs reports China’s steel production in the first 10 days of October continues to increase (up 4% from late September).
“We believe the production rebound is triggered by the recent steel price rise, which reaffirmed our view that a production cut is not sustainable in the oversupplied steel market, and idle capacity will restart production quickly once the price recovers,” GS said in an investor’s note. “In addition, the new steel capacity to come on stream in China will exacerbate already severe oversupply, in our view.”
It is a view shared by many.
“Despite being told by the government that production needs to be cut back, everyone wants to stand in front of the train and say they were the last ones to get out of the way,” a Singapore trader said.
"Because raw material prices are going down, the steel makers think in theory they could make some profit so they are intent on continuing with production. The problem for them is there is no demand.
“It is going to means warehouses full of steel and mountains of raw material before China starts dumping its steel on to the market.”
There have been some steel makers in China playing by the rules, however. Shanghai-based SteelHome told Energy Publishing there has been a raft of production cutbacks announced by domestic steel makers in recent weeks.
In the latest round of announcements, Shandong province said it will reduce steel production by 22.57Mt by 2015. Chongqing city in south west China has reported it has shut down 53 small sized steelmakers this year, and will eliminate 1Mt of iron making capacity and 86kt of steel making capacity. More will follow.
And while demand for crude steel in China is a far cry from matching production, Chinese steel makers will continue to seek out buyers in export markets.
“China exported 5.15Mt of steel products in September,” SteelHome said. “This is an increase of 21.46% or 910kt from August. The continuous growth in steel product exports relieved the oversupply pressures to some extent.”
Added an industry analyst: “It is such a bind for Chinese steel makers who need to keep producing because that’s all they know how to do.
They understand demand is depressed right now but the Chinese have learnt to be optimistic and they will be betting everything on demand recovering sooner rather than later whether the economics support it or not.”
More information can be found in the China Coal Report which presents weekly updates on both the producer and consumer sides of the Chinese coal market. With information on trade, transport and policy updates, the China Coal Report provides comprehensive coverage for anyone dealing with the Chinese coal market.
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