China’s steel output increase will add to investors’ fears

The declining prices are an indication that demand may not be strong enough to absorb the increase in output


In India, a declining domestic production of steel and rising demand would have normally seen importers rushing in, but higher duties have seen imports decline 40.9% from a year ago. Photo: Abhijit Bhatlekar/Mint
In India, a declining domestic production of steel and rising demand would have normally seen importers rushing in, but higher duties have seen imports decline 40.9% from a year ago. Photo: Abhijit Bhatlekar/Mint

China’s crude steel output growth has inched up in May, compared with April, rising by 1.8% from a year ago, according to the World Steel Association (WSA). This increase is despite a declining trend in iron ore and steel prices during the month.

The declining trend in iron ore prices continued in June and the UK’s decision to leave the European Union may see commodity prices turn bearish in July as well, unless counter measures taken by the government and central bankers succeed in calming the markets.

The rest of the world won’t be too happy with China as the overall global production in May declined by 0.1%.

If one excludes China, however, then the global steel output would have declined by 2%. While the world is cutting output which supports steel prices, China’s steel mills are doing the opposite.

The declining prices are an indication that demand may not be strong enough to absorb this output. The sentiment in China’s steel market fell further in June, according to S&P Global Platts, with the market participants expecting new steel orders and prices to weaken.

The European Union, the centre of attention now, saw output decline by 5.5% in May and by 6.4% in the January-May period. The Americas have seen output decline sharply, especially in the developing markets.

India remains a bright spot, with output increasing by 4.9% in May.

India’s joint plant committee (JPC) data shows crude steel at slightly lower levels, compared with what WSA has estimated, although the global numbers could be revised later. Anyway, JPC’s finished steel data shows production is actually down by 0.9% in May as smaller steel producers have seen a 7.4% decline in output.

Consumption, however, has risen 3.8%. A declining domestic production and rising demand would have normally seen importers rushing in, but higher duties have seen imports decline 40.9% from a year ago. So, availability and consumption nicely balance each other, which is good for local steel firms.

The global economic conditions and their impact on steel demand—and China’s inability to curb steel production—remain the main concerns of global steel makers. In India, the sharp increase in steel imports is no longer a concern but the debt on books of some large steel firms still is. To this mix, Brexit has been added; whether that turns into something bigger than just a minor storm is what investors in steel companies should be watching out for.

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