Chinese steel production unsustainable

Chinese steel production may be flat or lower in the next 12 months.  WSD has adopted this viewpoint even though Chinese steelmaking capacity next year may climb another 29 million tonnes despite some closures.  Why?  The Chinese steel sheet market is now severely oversupplied, reflecting largely the incredible surge of steel production during the past year.   

Even though Chinese steel demand is strong year-to-year, WSD thinks that steel traders and users may have added to their inventories in October by as much as 4 million tonnes – a 48 million tonne annual rate.  We reach this conclusion by comparing Chinese steel production to our Chinese steel consumption and export estimates.  The steel mills, in some instances, have helped some trading companies to finance their burgeoning inventories.  The Chinese mills are desperately seeking outlets for their product, say our contacts.   BaoSteel for the first quarter has just cut its list price for hot-rolled band by almost $100 per tonne, which brings it down to a level just above the market for the other mills (where it can sell its products).  

Our assumption is that Chinese steel production will decline in November 2005.  However, given the steel mills’ propensity to add to capacity and their desire to seek to sustain output by boosting exports, perhaps Chinese steel production will remain close to peak levels through December 2005.  Of course, the longer the period of excess production, the greater the likelihood that the need to cut output will be even more severe.  (Note:  If the Central Government were to announce in January 2006  the termination of the 11% export tax credit effective March 1, 2006, exports would probably remain high through March.)