China’s Steel Slowdown Seen Setting Stage for Consolidation

China’s steel industry, the world’s biggest, is poised for consolidation as flagging demand and falling profits allow the government to create more dominant companies, according to Sanford C. Bernstein & Co.

The financial health of Chinese mills has deteriorated amid an economic slowdown that’s reducing demand for steel after decades of growth. This may pave the way for a government-backed wave of mergers, a plan first announced a decade ago, Bernstein analysts including Vanessa Lau said in a report on Wednesday.

“Although the steel industry has shown little political will in the past, we believe it will be different this time around,” the analysts wrote in the report. “With falling steel prices, negative domestic demand growth, and deteriorating financial health, the steel industry is ripe for consolidation.”

Steelmakers worldwide are competing against a surge in Chinese exports as the country’s mills seek overseas markets for its surplus. Steel production in China dropped 1.6 percent in the first five months of this year while outbound shipments rose 28 percent.

China’s government is expected to publish later this month a new consolidation plan for the steel industry, which would target putting the top 10 producers in control of at least 60 percent of the country’s output by 2025, according to Bernstein. Poor profitability, as well as a focus by the central leadership on reducing pollution and wider industrial overcapacity, should help the government reach its target, the analysts said in the report.

Steel rebar, used in construction, fell a fourth day, losing 0.6 percent to 2,229 yuan ($359) a metric ton on the Shanghai Futures Exchange as of 10:34 a.m. local time. Prices are down 26 percent in the last 12 months. Spot rebar declined a ninth day to the lowest since at least 2003.

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