Lower output due to fall in prices

G Chandrashekhar

Washington, Aug. 14

Is China's steel production slowing? The July data released last week showed that crude steel production fell month-on-month.

On an annualised basis, production fell to an annualised rate of 425 million tonnes (mt) a year, down 4.6 per cent or 21 mt a year from June's 446 mt a year.

This is the biggest month-on-month fall in the recent past.

This fall reflects a fundamental behavioural change in the Chinese steel industry and reflects a response to weaker prices, Macquarie Research said quoting a Shanghai-based steel analyst.

The recent steel price downturn started in the second week of June and within a month Chinese steel mills were able to work collectively to reduce their output.

Market oriented

Private steel mills account for around a quarter of total Chinese steel production.

These mills are more market oriented.

The larger steel mills (state-owned enterprises) also realise that a price war will not crush their private sector competitors given the latter's low capital and operating costs.

Analysts believe the slowdown in July indicates that Chinese steel industry is getting more attuned to market fluctuations and it is possible for them, even in a still fragmented industry, to collectively reduce output in response to fall in prices.

The July data also confirms that recent trend towards slower growth in steel consumption in China indicates that the recent slowdown measures appear to be working, Macquarie pointed out.

Iron ore imports in July were 24.7 mt down from June's massive 28.7 mt.

Reports from China indicate that the recent surge in shipping rates have caused buyers to pull back from the market. In addition, mills are planning to run down port stocks in the short run.

China's iron ore imports in the first seven months totalled 186.2 mt up 21.8 per cent year-on-year and still seem to be headed to the 320-330 mt range for the year as a whole.

During January-July this year, China was a net exporter of 13.4 mt of steel products, compared with a mere 2.4 mt during corresponding period in 2005.

The Chinese government continues its efforts in issuing new policies to try and control the high speed of economic growth, targeting the real estate sector and high energy consumption sectors.

These sectors are also intensive users of steel.

Concerns

There are ongoing concerns in China about capacity increases in 2006 and 2007. To catch up with booming demand, Chinese steel mills, led by large and medium-sized state owned enterprises, heavily invested in steel capacity in recent years, especially in hot rolled medium/heavy plate and coil. These investments were also partly aimed at upgrading product quality.A large portion of hot rolled flat capacity comes on stream in 2006 and 2007, while many small and private mills expanded the capacity in long products during 2003-2005.

(This article was published in the Business Line print edition dated August 15, 2006)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.