Chinese mills likely to curb declining prices by cutting output

In the meantime, the country’s steel industry invested RMB 291.1bn (US$46.63bn) in fixed assets, up 12.05% year-on-year, but the growth rate was 4.8% lower than that in the same period last year.

However, the country’s apparent steel consumption hardly saw any improvement and steel use was mostly taking existing inventories, according to Zhang Changfu, General Secretary of China Iron and Steel Association (CISA).

In sharp contrast to the continuing high production level is the decline in steel prices on the domestic market. Statistics from CISA showed that so far in 2012 there was a fall in the prices of the eight most frequently used steel products on the marketplace. The price of high-speed wire, rebar, and plate remain at RMB 4,000/t ($627.8) compared with a price of around RMB 4300-4500/t ($674.9 – 706.3) at the end of last year. These falling prices have resulted in large profit losses to domestic steelmakers, making 2012 the ‘hardest year’ for this sector, according to CISA.

In August 2012, the national average price of rebar in China fell around 14% compared with April this year, which may indicate that a sharp reduction in the domestic production capacity is underway.

CISA has called on its members to desist from continuously increasing steel production amid a lacklustre domestic market. High output in H1 2012 severely depressed steel prices pushed down profits.

In the face of the poor performance, CISA has repeatedly called on domestic steel mills, or its member companies at least, to reduce production with the aim of preventing further price falls.

However, so far the appeal has had little effect, and no mill is willing to take the lead in cutting output. Oversupply and destocking remained as the two major reasons behind the country’s plunge in steel prices in the first half 2012, but only 33 steel mills out of the 76 CISA members reported lower steel output in that period.

Although mills in China have started to at least partly suspend production and to overhaul facilities, this will lead only to a limited cut in total output.

The combined output from the 33 CISA member steelmakers that capped their production fell by only 310kt in the first half of 2012, but that from the non- CISA members increased output by 12.9% during the same period. Some CISA officials pointed out that all the newly added output of crude steel has come from non-CISA members, blaming them for the rapidly dropping prices.

Daily crude steel output of CISA member steelmakers reached 1.6512Mt in mid-July, down 0.38% from the preceding 10 days but daily output of crude steel nationwide saw a rise despite the declining output from CISA member steelmills. China’s daily output of crude steel is estimated at 1.9993Mt during July 11-20, up 2.1% from the previous 10 days, according to CISA. Maintenance of steel plant, most of which is arranged during July and August, is routine and does not affect the planned output. Although many steel mills are overhauling facilities, few of them are suspending the use of blast furnaces.

Before shutting down part of their capacities, steel mills have to take into account multiple cost factors such as labour costs, taxes, loans, and others. Provincial governments may also forbid them from laying off employees.

Source: China Metals e-mail infochn@public.bta.net.cn