March 30, 2016

Analyst: Chinese Need to Shut Down 500 Million Tons of Capacity

American steelmakers have spent much time railing on China from afar, perhaps without first-hand knowledge of how the Chinese steel industry operates. Terrance Ko, a managing consultant for Hatch Associates, has just such a vantage point, having worked in the Far East since 2005. And his opinion of Chinese steel, if anything, is even more critical than the typical North American steel executive. During a presentation on the Chinese market at the recent Platts North America Steel Conference in Chicago, Ko laid out a damaging assessment of the problems facing that country’s steel industry.

According to Ko, Chinese fixed asset investment grew steadily until about 2009, at which point it began trending significantly downward. But Chinese capacity remained on an upward trend until 2014, creating the current massive supply-demand imbalance.

As a result of that oversupply and its effects on pricing, Chinese steelmakers suffered tremendous losses in 2015. By Ko’s estimate, the average Chinese producer lost about $100 RMB (about $15 U.S.) per metric ton last year. Many of the producers who remained profitable did so only through subsidies from the Chinese government, which totaled more than $2.6 billion last year.

China’s government has begun to take steps to rectify the unsustainable situation, with 150 million tons of capacity targeted for closure by 2020. Ko describes that effort as too little capacity over too long a time frame to do much good. In fact, last year, about 90 million tons of steel capacity was idled in China, making barely a dent in the industry’s overcapacity problems. “Our reaction is, 150 million tons does not reflect the long-term structural needs. The Chinese need to shut down 500 million tons,” Ko said.

To put that figure in perspective, he suggests the Chinese need to shutter about three times the current steelmaking capacity of the entire U.S. in order to address the world’s oversupply problem.

For more from the Platts Conference, see the April issue of Metal Center News.
 

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