The Truth about Planned Cuts to Chinese Steel Capacity

A news report published by Metal Bulletin today spoke of officials in China looking to eliminate up to 45 million tpy of crude steel capacity in 2016 as part of its efforts to address overcapacity. This follows another announcement made back in February 2016 where China’s State Council stated the central government wanted 100-150 million mt/y of steel capacity eliminated during 2016-2020. 

This is significant news since the issue of Chinese steel overcapacity is often cited as being the prime cause for the current downtrend trend in global steel prices, fully in line with our expectations and forecasts published in our latest edition of "Global Steelmaking Production, Capacity and Capex: A Five Year Market Outlook"  - click here to see a full sample of this study/database service http://bit.ly/28XNbP4  

In reaction to this, I have some personal thoughts I'd like to share with you in this post. 

a) Despite best intentions, I do not think that these announced targets for cuts in capacity in 2016 and 2017 are  going to be fully realized in reality. Any seasoned observer of the Chinese steel industry could tell you the level of skepticism there is for capacity cut announcements based on historic precedence.

b) Even if they did, significant overcapacity will still remain in China's steel sector, and enough to negatively impact steel prices going forwards. If enacted fully and successfully this would only represent  approximately a 15% reduction in the total excess steel making gross capacity that currently exists in China today.

c) Moreover, China is still planning new capacity additions despite announcements for cutbacks being made at the same time - again, according to our latest edition of the "Global Steel making Production, Capacity and Capex: A Five Year Market Outlook". Assuming no delays in start-up's there is a potential for China to add an additional 44m tpy of brand new crude steel capacity out to 2018 (a full list of these plants/projects is provided in the report  - again click on the link to see the working sample of our new research on this).  http://bit.ly/28XNbP4  

The ramifications to this are the following:

It is important to understand that production and capacity are linked, and that massive overcapacity of this sort that exists, and likely to still exist in China, drives overproduction. This will have important negative consequences to global steel prices and future steel company earnings.

It also means that despite announcements being made, in reality, China's over capacity was built, and more to the point still continues to be built, towards social stability & employment considerations rather than long-term market and economic viability.  

China’s planned capacity cuts will not be enough to quell the growing controversy surrounding China's impact on the global steel industry. This will continue to drive further calls for market protectionist measures against China. The US is extremely unlikely to agree to Beijing’s demand for Market Economic Status, especially in an election year during which the front runners for the Democratic and Republican parties’ presidential nominations have threatened to roll back a range of free trade agreements backed by the Obama administration.

Source: www.metalbulletinresearch.com