Why Chinese steel output is up despite capacity cuts？
Still Steel Overcapacity.
With China’s crude steel output in the first ten months of 2016 up nearly one percent year on year (obviously means steel overcapacity), many have wondered aloud how to make sense of the data, especially as fresh claims of progress on supply-side structural reforms have recently emerged.
According to the National Development and Reform Commission last week, the target to cull 45 million mt in steel capacity this year was achieved by the end of October.
So why is steel production not receding? Do the effects of the capacity cuts need more time to be realized, or have we been treated to a belch of hot air by Beijing’s propaganda machine?
A key to answering these questions lies perhaps in a piece of information recently unveiled, but that has gone relatively unnoticed: About 74% of the 45 million mt of targeted capacity were no longer in production to begin with, China Iron & Steel Association party secretary Liu Zhenjiang was reported by Economic Information Daily as saying at a recent seminar.
Other Chinese media have meanwhile reported that actual capacity reductions this year will be closer to 70 million mt. While it wasn’t revealed how much of that comprised idled capacity, the impressive figure — close to half of the 150 million mt in total steel capacity that the nation is aiming to weed out over the 13th Five-Year Plan (2016-2020) — isn’t surprising. Provincial and local government officials stand a higher chance of getting promoted by exceeding targets, and the removal of capacity that had already been closed represents low-hanging fruit.
Key factor – Baowu Iron & Steel
Among the most prominent wins so far can be seen in the mega-relocation of ten steelmakers within Tangshan city’s Fengnan district to a coastal, greenfield site, that will see not only a net reduction of 4 million mt in capacity, but fulfil other aspects of supply-side reforms like industry consolidation and, likely, the use of more efficient and environmentally friendly technology.
The formation of the world’s second-biggest steelmaker, Baowu Iron & Steel, from the merger of Baosteel Group and Wuhan Iron & Steel Group, and the immediate decision taken to drop the latter’s plans to build a 9 million mt/year works in Fangchenggang, Guangxi province, can be hailed as another instructive manifestation of the reforms.
But the most telling reason why steel output hasn’t abated so far is likely strong production margins since the start of the year, which remain true for flat steel producers even after coking coal prices have quadrupled. Long steel producers, having made hay, are now only starting to call it a day by cutting output, as margins turn negative and the winter dulls demand.
Capacity cut targets for 2017 have yet to be announced, although what has been stated is that they “will not be less” than this year’s. This should give some relief to the competitors of Chinese steel, with the caveat that even the full achievement of the 150 million mt of cuts would mean little if margins continue to incentivize production. (Source: platts)