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Tanners: China May Finally Address Overcapacity

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The new presidential administration and its position on trade deals, tax policy and infrastructure was a frequent topic at the 13th Platts Steel Markets North America Conference this week in Chicago. But Timna Tanners believes, when it comes to the short-term outlook for the domestic steel market, China trumps the commander in chief.

“So many investors want to talk about Trump,” said Tanners, the steel industry analyst with Bank of America Merrill Lynch. “I’m convinced, at least for now, that what’s happening in China is more important than what’s happening in Washington.”

And, in sharp contrast to other experts at the conference, Tanners believes the situation in China may improve. While other analysts decried China’s ongoing overcapacity, and its threat to global steel prices, Tanners’ firm believes the Chinese government’s vows to get production under control may finally have some teeth. “Last year, the Chinese decided to curtail coal production. This is the year they’re going to curtail steel production,” predicts Tanners.

Two factors will drive the long-sought change to the country’s steel glut, Tanners said. Pollution is a growing concern among the Chinese population as the air quality in Beijing and other large cities deteriorates. “There’s also a greater awareness with the Chinese about profitability at the expense of production, which we learned a while ago,” she said.

Furthermore, China’s internal demand is looking much stronger than most analysts anticipated, which will pull more steel toward local consumption instead of unleashing those extra tons on the world market. Bank of America Merrill Lynch forecasted a 1 percent decline in China’s domestic steel demand in 2017, but right now it’s running about 1 percent above prior-year levels. “Given the law of big numbers, that makes a big difference in the supply of excess steel,” Tanners said.

Positive signs out of China will pay dividends at home, she added, forecasting a hot-rolled price averaging $650 per ton this year, a $120 gain over 2016.