If anyone doubted the magnitude of the crisis facing the world’s largest steel industry, listening to Zhu Jimin (朱繼民), the deputy head of the China Iron & Steel Association (CISA, 中國鋼鐵工業協會), would put them right, fast.
Demand is collapsing along with prices, banks are tightening lending and losses are stacking up, Zhu said at a quarterly briefing in Beijing by the main producers’ group.
“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” he said. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”
China’s mills — which produce about half of worldwide output — are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas.
Shanghai Baosteel Group Corp (上海寶鋼集團) forecast last week that China’s steel production might eventually shrink 20 percent, matching the experience seen in the US and elsewhere.
“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills lowered prices in competition to get contracts.”
Medium and large-sized mills incurred losses of 28.1 billion yuan (US$4.4 billion) in the first nine months of this year, according to a statement from CISA. Steel demand in China shrank 8.7 percent last month year-on-year, it said.
Signs of corporate difficulties are mounting. Producer Angang Steel Co (鞍鋼) this month warned it expects to swing to a loss in the third quarter on lower product prices and foreign-exchange losses. Last week, Sinosteel Co (中國中鋼), a state-owned steel trader, failed to pay interest due on bonds maturing in 2017.
Crude steel output in the country fell 2.1 percent to 608.9 million tonnes in the first nine months of this year, while exports jumped 27 percent to 83.1 million tonnes, official data showed. Steel rebar futures in Shanghai sank to a new low yesterday as local iron ore prices fell to a three-month low.
China’s mills face some of their worst conditions ever and the vast majority are losing money, Citigroup Inc said last month. The outlook is the worst ever amid unprecedented losses, Macquarie Group Ltd said this month.
China’s steel production might contract by a fifth should the country’s path follow Europe, the US and Japan, Shanghai Baosteel Group chairman Xu Lejiang (徐樂江) said last week. The company is China’s second-largest mill by output.
“Financing remains an acute problem as banks strictly restricted lending to the steel sector,” Zhu said. “Many mills found their loans difficult to extend or were asked to pay higher interest.”
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