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© daniel schweinert dreamstime.com Electronics Production | June 12, 2013

Chinese steel overproduction mean supply-chain risk

Massive overproduction this year among China’s steel mills has pushed the country’s production to an all-time-high, resulting in rock-bottom prices but possible longer- term risk for buyers.
China’s steel production rose to an annual rate of 800 million metric tons as of March, nearly double from 420 million at the end of 2008, according to information and analytics provider IHS. For China, such a level of steel production represents a historic high.

“Essentially it’s going to be a buyers’ market for steel in 2013,” said John Anton, director of the IHS steel service. “For steel production, there’s good restraint in North America, Europe and most other parts of the world. However, the Chinese are grossly overproducing, which will keep the market in a state of surplus this year.”

Prices hit bottom

Following declines in April and May, global steel prices are at extremely low levels. However, despite the market oversupply, prices are not expected to decrease much more this year. It’s nearly impossible for prices to go much lower because the Chinese steel mills are already selling below cost,” Anton said. “That means they are making steel and selling for less than the cost of the iron ore, coal and labor they are putting into it. This cannot continue much longer.”

China’s conundrum

Anton noted that Chinese companies can’t persist in losing money on every sale—and expect to stay in business. As a result, the steel mills must either cut production later in the year, or they will have to obtain subsidies from the government or a private source.

Having already suffered massive losses in 2012, the Chinese suppliers do not have enough money themselves to continue to subsidize another red-ink bath in 2013. Government subsidies would subject the Chinese suppliers to the risk of overseas antidumping action or countervailing duty damages. Banks, for their part, are unlikely to make loans to companies that lost money in 2012 just for them to lose more in 2013.

Cutbacks inevitable

With no other viable choices, Anton predicts that steel producers will reduce production levels, resulting in 10-15 percent price increases by the end of the year. If, however, the banks decide to lend money to the Chinese steel manufacturers, then prices in 2014 will stay as low as they are in 2013.

Buyers beware

This is great news for buyers, but it’s also a potential warning sign for companies that rely on Chinese steel producers.

“We don’t want you to think that suppliers will all go bankrupt, but someone will eventually have to cut production in China,” says Anton. “Even if they stay low in 2014, steel prices can’t stay suppressed forever. At some point there will have to be some reckoning.”

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