China has too much steel on its plate

Supplies of Chinese steel plate continue to rise, with new facilities due to open just as demand from the country’s shipbuilders goes into a tailspin.
Market analysts at a conference on the mainland said last week that the 2008 output of steel plate increased 63 per cent to 20.1m tonnes and that new facilities producing the raw material were due to go online this year.
This figure vastly exceeds the local estimated requirement of the country’s shipbuilders of 11.7m tonnes.
Baosteel, China’s largest steel mill, officially reduced its prices this month to US$570 per tonne from a high of more than US$900 per tonne in the third quarter of last year.
A South Korean analyst said that rumours had been circulating in the market that major South Korean yards had been booking some supplies of Chinese steel plate for as low as US$470 per tonne.
In Japan, a shipbuilder who did not wish to be named said the industry expected steel plate demand to drop 10 per cent to 5m tonnes in fiscal 2009.
Japanese steel mills cut their prices by 46 per cent to US$700 per tonne in February.
A collapse in global steel prices was accomplishing what the Chinese Government has failed to do for years - consolidate the country’s fragmented, fast-growing steel mills, with an aim to improve their leverage, observers believe.
But the effort to find efficiency and pricing power with scale may be too late to stave off a lengthy spell of depressed prices, as mills rush blindly to increase output during the slow industry consolidation.
China, home to about 700 steelmakers, wants to crunch the sprawling sector into a few big players for better bargaining power with iron ore miners and to control overcapacity.
The world’s top steel producer aims for its firms to compete with global giants such as ArcelorMittal and by 2010 wants half the country’s production to be accounted for by its top 10 steelmakers, instead of a top 20 now.
“There have been some consolidation moves, but so far, most companies have only agreed to merge to become bigger, and no sizeable capacity has been actually removed from the market to bolster prices,” Kim GJ, a Samsung Securities analyst said.
“China’s top 10 steelmakers, which increased their combined domestic market share to 42 per cent from 29 per cent in 2007, need to achieve 70 per cent to control prices.”
Chinese spot steel prices dropped 4 per cent earlier this month, falling for a fifth consecutive week, hit by weak demand, tumbling exports and growing inventories.
Prices of China’s benchmark hot-rolled coil fell to around Yuan3,345 (US$489) a tonne from Yuan3,375/ Yuan3,605 quoted the week before, Metal Bulletin data showed.
The consolidation plan - which is accelerating as China’s giants hunt for survival strategies during the global financial crisis - should eliminate excess capacity, the major culprit for the recent plunge in Chinese steel prices, analysts said.
“The smaller [firms] are being taken over by the larger ones, so it will increase efficiency,” Michelle Leung, a Hong Kong-based analyst at CIMB-GK said.
“China now has a very serious supply side situation,” she added.
“The consolidation will close down the inefficient mills pretty quickly.”
Last year, Baosteel Group, China’s top steel mill, took over Shaoguan Iron and Steel Group and Guangzhou Iron and Steel Group.
Wuhan Iron and Steel, parent of Wuhan Steel, bought into smaller rival Liuzhou.
Hebei Iron and Steel was formed in a merger of two major steel firms, the parents of Tangshan Iron and Steel and Handan Iron and Steel.
Shougang Iron & Steel is in talks to buy Shanxi-based Changzhi Iron & Steel, while Baosteel will buy a stake in a small mill in east China.
Despite the efficiency gains, China still has overcapacity of well above 100m tonnes, equivalent to the total output of second-ranked Japan.
That makes the road to stable prices long and fraught with difficulties, analysts said.
The industry’s top firms will have to claim more market share in order to effect real change.
Last month, the case for consolidation gained further momentum, as data showed China was rushing to raise output while the world is slashing production by a quarter due to faltering demand from car makers.

Story by: Mike Grinter, Hong Kong, Lloyds List Daily Commercial News
Source: Lloyd’s List Daily Commercial News - www.lloydslistdcn.com.au

“Whopping surpluses” of iron ore: analyst
Speaking at the Global Iron & Steel Forecast Conference in Perth this week, Citi Investment Research managing director Alan Heap forecast production cuts of up to 260 million tonnes worth of iron ore this year and a further 320Mt next year.
Heap said that steel production is expected to drop 8 per cent in 2009, recovering slightly in 2010.
Seaborne iron ore demand is expected to be down 7.5 per cent, while iron ore supply will increase 7 per cent this year.
He estimated the iron ore benchmark price will fall 30 per cent in 2009 and a further 20 per cent in 2010 as supply outweighs demand. But Citi sees margins falling by only 20 per cent with a decrease in input costs particularly labour and diesel. This would still represent margins of around 50 per cent.
Referring to the end of high demand and prices, Heap said, “It’s always been a question of when and not if, and that when has arrived sooner than we expected,” he said.
In the longer term, Citi sees iron ore supply increasing by 30 per cent by 2012.