What's the outlook for Chinese steel production?

The Chinese steel mills don’t seem to be on the verge of an export offensive – unless, perhaps, there is a sizable rally of the world price. And, even given higher world export prices, Chinese governmental policymakers may seek to dampen exports for a number of reasons, including the sizable pressure that the Chinese steel industry is exerting on the country’s infrastructure (ports, railroads, water, electricity, roads) – which is “crowding out” the growth of other industries. For example, governmental policymakers might eliminate the 11% value added tax credit on finished steel products, as they did in the case of slab, if exports were to start to boom.

The government’s new 15-year “plan” for the steel industry calls for consolidations, rationalizations (including the elimination of as much as 80 million tonnes of capacity), more efficient use of energy and raw materials, reduced air and water pollution creation, more large coastal plants, and no steel mills controlled by foreign groups. It is planned that the 10 largest mills in the country, which currently account for about 37% of steel production, will account for about 50% of production by 2010 and 70% by 2020.

The government’s plan is not calling for a proactive (i.e., helpful) stance towards smaller and private Chinese steelmakers, many of which may be forced to pare output due to high costs and weak finances.

In the remaining months of 2005, if apparent domestic steel product consumption amounts to less than 300 million tonnes annualized (WSD’s expectation), and the steel mills don’t boost exports and decide to not add further to their inventories, steel output would fall sharply. Any reduction in production will cause considerable stress in the steel industry since, in 2005, additions to capacity may be about 80 million tonnes for coke ovens (including 40 million tonnes for the steel mills themselves), 50 million tonnes for blast furnaces, 50 million tonnes for steelmaking units, 50 million tonnes for continuous casters and 30 million tonnes for hot-strip mills.

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