KWEB - Alarm Bells Go Off For Chinese Steel Manufacturing

2023-07-06 04:34:00 ET

Summary

• The China Iron and Steel Association statement asserts that the industry recently reached a critical turning point in terms of demand.
• The Chinese government continues to encourage mergers and production reductions to resolve the persistent issue of oversupply.
• The spot price of steel rebar, a vital construction material, declined by more than 8% this year.

Original Post

By Sohrab Darabshaw

This past weekend, China’s primary steel manufacturing companies released a cautionary statement regarding their profits. In the statement, the manufacturers acknowledged a series of obstacles they expect to encounter in the latter half of the year. They also attribute disappointing demand, dwindling profitability , and cost reduction pressures as the primary factors exacerbating these challenges.

The China Iron and Steel Association ((CISA)) statement asserts that the industry recently reached a critical turning point in terms of demand. As stated by the quartet of companies, the issues of insufficient end-user consumption and persistent thin profit margins are particularly significant.

Indeed, China’s steel manufacturing industry continues to grapple with these two problems in particular. A recent purchasing managers index indicated a contraction in June, despite an upswing in orders . Moreover, nearly half of the major steel mills operated at a loss during the initial five months of the year.

No Substantial Stimulus for Chinese Steel Manufacturing

China’s steel mills account for over half of global steel production. They are also the largest importers of iron ore. Therefore, the country heavily relies on iron ore imports from Australia and Brazil to meet most of its steel production requirements. Unfortunately, steel manufacturing companies continue to encounter difficulties due to a stagnant recovery and a real estate crisis.

Meanwhile, the Chinese government continues to encourage mergers and production reductions to resolve the persistent issue of oversupply. As a result, the steel industry in China is experiencing a significant shakeout. Moreover, analysts expect these challenges will persist due to slow progress in reducing excess capacity.

The Chinese government has yet to implement substantial actions despite calls for increased stimulus measures to bolster growth. The steel industry’s profitability has remained low for nearly a year, yet the prices of raw materials for steel production remain relatively high. Irrespective of these formidable challenges, China’s economy grew more than in the previous year. This is largely the result of the government abandoning its zero-COVID restrictions.

Analysts Expect Shakeouts to Last Years

The spot price of steel rebar, a vital construction material, declined by more than 8% this year. Meanwhile, iron ore futures in Singapore dropped about 3% during the same period. These factors contribute to the warning issued by China’s steel manufacturing firms regarding the challenges to come in the second half of the year.

A report in the Nikkei quoting Xuelian Li, a senior analyst at the Marubeni Research Institute, said that given the present circumstances, industrial shakeouts are expected to persist in China over the next five to ten years.

In an effort to address the surplus of steel, the government continues to actively promote consolidation. As reported by Marubeni Research, the magnitude of excess supply, determined by subtracting steel consumption from the volume of crude steel produced, reached a seven-year peak during the first five months of 2023.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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