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China steel: overproduction and lower prices to persist
By Fitch Ratings |
August 31, 2012, Friday
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Print Edition
Print Edition
CHINA'S steel industry output continues to rise notwithstanding slowing economic growth, falling prices for steel, and poor profitability at the steel mills. Fitch Ratings believes this paradox can be explained first by the larger steel mills' priority of maintaining economies of scale and market share; and, second, by smaller steel mills taking advantage of the recent fall in raw material prices to ramp up production.
Fitch believes that the prices of steel and related raw materials - including iron ore and coking coal - are unlikely to rebound in the short term, but rather are looking for new equilibriums that take into account the increasing supply of raw materials and demand growth for steel which is likely to be slower.
Price weakness should continue during the second half of 2012 and through the end of the first quarter of 2013, due to weak seasonal demand typically associated with the winter period.
Industry rationalization is necessary for a sustained improvement in profitability, but Fitch does not expect this in the short term.
The financial resources of the large steel mills are stretched as a result of prior consolidation activity and weak profitability since 2008.
Some consolidation has taken place among some of the larger steel mills, but this has been confined largely to activity within the same province - given the important role that each steel mill plays within its own local economy.
Chinese crude steel production reached a record 61.693 million metric tons in July 2012, 2.5 percent higher than the previous month and 4 percent higher than in July 2011, according to data released by China's National Bureau of Statistics.
Moreover, the average daily steel output during the first 10 days of August totaled 1.97 million metric tons, up from 1.95 million metric tons during the last 10 days of July, according to data from the China Iron and Steel Association.
At the same time as output is rising, China's steel mills are facing falling steel prices, weak profitability, and soft demand for certain products such as steel plates.
Downward pressure
Chinese domestic hot-rolled coil prices fell to 3,511 yuan (US$551) per metric ton in August, their lowest level in 33 months.
Downward pricing pressure on steel is being driven by the country's slower industrial production growth of under 10 percent since April this year, compared with 13.9 percent in 2011.
Demand from China's shipbuilding, machinery and heavy equipment sectors is especially weak - resulting in negative production growth for steel plates so far in 2012. Total profit in the steel sector fell by 68.1 percent in the first half of 2012 from a more robust first half of 2011, according to the National Development and Reform Commission.
The decline in steel prices is in turn depressing the prices of iron ore. Iron ore with 62 percent iron content has now fallen below US$100 per metric ton for the first time since 2009 - and is down by 28 percent so far in 2012.
Fitch believes that this lower cost factor is encouraging some of China's smaller steel mills - with a production capacity of less than 2 million metric tons per year - to boost production. However, this is exacerbating the oversupply situation in the context of weak demand.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Fitch believes that the prices of steel and related raw materials - including iron ore and coking coal - are unlikely to rebound in the short term, but rather are looking for new equilibriums that take into account the increasing supply of raw materials and demand growth for steel which is likely to be slower.
Price weakness should continue during the second half of 2012 and through the end of the first quarter of 2013, due to weak seasonal demand typically associated with the winter period.
Industry rationalization is necessary for a sustained improvement in profitability, but Fitch does not expect this in the short term.
The financial resources of the large steel mills are stretched as a result of prior consolidation activity and weak profitability since 2008.
Some consolidation has taken place among some of the larger steel mills, but this has been confined largely to activity within the same province - given the important role that each steel mill plays within its own local economy.
Chinese crude steel production reached a record 61.693 million metric tons in July 2012, 2.5 percent higher than the previous month and 4 percent higher than in July 2011, according to data released by China's National Bureau of Statistics.
Moreover, the average daily steel output during the first 10 days of August totaled 1.97 million metric tons, up from 1.95 million metric tons during the last 10 days of July, according to data from the China Iron and Steel Association.
At the same time as output is rising, China's steel mills are facing falling steel prices, weak profitability, and soft demand for certain products such as steel plates.
Downward pressure
Chinese domestic hot-rolled coil prices fell to 3,511 yuan (US$551) per metric ton in August, their lowest level in 33 months.
Downward pricing pressure on steel is being driven by the country's slower industrial production growth of under 10 percent since April this year, compared with 13.9 percent in 2011.
Demand from China's shipbuilding, machinery and heavy equipment sectors is especially weak - resulting in negative production growth for steel plates so far in 2012. Total profit in the steel sector fell by 68.1 percent in the first half of 2012 from a more robust first half of 2011, according to the National Development and Reform Commission.
The decline in steel prices is in turn depressing the prices of iron ore. Iron ore with 62 percent iron content has now fallen below US$100 per metric ton for the first time since 2009 - and is down by 28 percent so far in 2012.
Fitch believes that this lower cost factor is encouraging some of China's smaller steel mills - with a production capacity of less than 2 million metric tons per year - to boost production. However, this is exacerbating the oversupply situation in the context of weak demand.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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