Chinese steelmakers are deepening the first production cuts in a quarter century as the bull market in iron ore drives up costs and squeezes profits.
Crude steel output will shrink by as much as 2 percent this year, according to the China Iron and Steel Association (CISA, 中國鋼鐵協會). That is lower than the group’s March estimate of a 1.1 percent decline and would be the first contraction since at least 1990. An acceleration in raw material costs and a collapse in steel prices has pushed the Bloomberg Intelligence China Steel Profitability Index to the lowest in almost seven years.
After decades of rapid growth spurred an unprecedented expansion in steel production, China is now grappling with excess capacity as a property-led slowdown crimps demand. A contraction by the nation’s mills will be a boon to steelmakers from Brazil to the US, who say record exports from China are destabilizing the global market.
Iron ore swung from a bear to bull market this year as the top producers boosted low-cost supply and port stockpiles in China, the biggest buyer, slid to the lowest since 2013. Ore with 62 percent content delivered to Qingdao was at US$61.77 per dry tonne on Thursday, up 20 percent this quarter.
Steel reinforcement bar, used in construction, has fallen 14 percent this quarter to 2,265 yuan per tonne as of yesterday, the lowest since at least 2003, according to data from Beijing Antaike Information Development Co (安泰科信息開發).
“A rally in iron ore and a persistent fall in steel prices have presented a grave situation for the Chinese steelmakers,” the CISA said in a report on June 12.
Falling profits might indicate a decline in China’s manufacturing purchasing managers’ index (PMI) in the coming months, Bloomberg Intelligence said yesterday. The factory gauge was 50.2 last month, just above the level that signals expansion. Movements in the Bloomberg Intelligence steel profit index have been leading indicators of manufacturing PMI.
The divergence in iron ore and steel prices is like “dough becoming more expensive than bread,” Shanghai-based Jianfeng Asset Management Co (健峰資產管理) fund manager Liang Ruian (梁瑞安) said.
Property and construction is slumping as the country shifts away from investment-led growth to a consumption-driven economy. The amount of land purchased for real-estate development fell by 31 percent in the first five months of this year and new construction starts slumped 16 percent, according to the Chinese National Bureau of Statistics. About 35 percent of China’s steel demand is related to housing and construction-related activity, according to Goldman Sachs Group Inc.
Signs of a recovery in the property market have not resulted in renewed building and steel demand, Liang said.
“It only serves to help them unload inventories, which is not going to help steel consumption,” he said. “I don’t see any property developers rushing to build new apartments.”
China’s apparent steel demand fell by 4 percent to 302 million tonnes during the first five months of this year, a reversal from 3 percent growth last year, according to Bloomberg Intelligence estimates. Crude steel output will shrink to as low as 807 million tonnes this year from 823 million last year, according to the steel association.
“The world’s largest steel industry is entering a turning point,” CISA deputy secretary-general Li Xinchuang (李新創) said in an interview in Beijing this week. “Low prices will be with us for a long time. So will tepid demand and zero growth, or even contraction, in output.”
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