There's A Huge Steel Production Surplus In China

Getty/Quinn Rooney

Despite a number of steel mill closures in China this year, surplus production capacity remains.

Required reading for anyone interested in the Chinese resources sector and economy, the Bureau of Resources and Energy Economics’ China Resources Quarterly is out and it’s packed with insights.

Looking at the steel sector, there is a reshuffling going on. Many high cost steel producers in China are currently being weeded out. Some analysts expect a number will eventually cease production, with some already shutting up shop because it will be unprofitable for them to continue in a lower price environment.

This chart shows steel prices were lower across the board in the first quarter but production didn’t fall with it.

Commenting on the Chinese steel sector, BREE said: “While some steel mills have closed recently amid tighter credit conditions, there remains surplus production capacity in China.”

The China Iron and Steel Association has also since announced that steel companies “…are no longer expanding capacity. The are putting emphasis on environmental protection”.

China’s steel production in the first quarter was a record 201 million tonnes, up 6.8% quarter-on-quarter and 4.9% over the year.

Between December and February the steel industry saw output growth outstrip sales, driving stock levels up. Demand was pulled down by lower construction investment and lower auto and non-transport machinery sales.

In March output slowed to better align with sales but BREE said “another few months of restraint will likely be required”.

The bureau is also predicting when it comes to sequential growth “the worst is probably now past”.

Rising steel stocks at the mills has resulted in weaker demand for iron ore inputs and has been one of the factors pushing on the iron ore price over the quarter which declined from about $US135 in January to a low of $US105 in mid-march.

However weaker mill demand hasn’t stopped China importing and stockpiling iron ore, one of the key inputs in steel making.

Over the quarter a record 22 million tonnes of iron ore was imported, Bree said, “despite the downturn in prices, Chinese interest in foreign iron ore assets remains strong”.

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