The importance of China to the global steel sector and its suppliers has been reinforced in the past few months. Never has there been a time when the old adages ‘Ignore China at your peril’ and ‘When China sneezes the whole world catches a cold’ seemed as pertinent as in the last few weeks.

According to reported statistics, in Q2 of this year the average daily production of steel was almost 2Mt. The figure in Q3 is expected to be down slightly. Moreover, Chinese average steel prices declined for five months up to the second week of September, according to the Ministry of Commerce – a reduction of RMB1000 per tonne (US$157) or 23%.

This downturn in the fortunes of the steel sector in China has had profound effects upon the global steel market and raw material supply industries around the world. Iron ore benchmark spot prices have fallen by approximately 35% in recent months. Imported coking coal prices dropped by approximately 40%. These substantial raw material price reductions were, in part, the result of a build up of stocks in China and at the mines.

The sharp collapse in prices for iron ore and coking coal has sent shock waves through these industries. The major mining companies are reducing spending on growth projects. Others have abandoned expansion plans. Cash flow for several companies is under pressure after massive reductions in their income. There is even talk that the so called commodities ‘supercycle’ is coming to an end.

This downbeat sentiment is not confined to the mining sector. Many steel companies are worried about the ‘knock-on’ effect of the slowdown in growth in the Chinese steel industry. Plant closures are highly unlikely in China because they are difficult to achieve in a predominantly state owned sector which is keen to maintain employment. Overcapacity remains a problem in the country. Moreover, inventories at the mills and through the supply chain are too high.

The big fear for western mills is that the excess is already being shipped to foreign markets at low prices.

This is likely to translate into negative price pressure in most parts of the world. The prospects of lower raw material costs will, inevitably, be welcome news to the steelmakers to improve their competitiveness with plastics, aluminium etc. However, customers will be pressing for the major share, if not all, of the mill’s savings on input costs.

Source: MEPS China Steel Review