Photographer: Maurice Tsai/Bloomberg

China Steel Output May Collapse 20%, Baosteel Chairman Says

Updated on
  • Industry losses seen at 18 billion yuan in first eight months
  • Prouction drop may match experience in U.S. Europe, Xu says

China’s steel industry, the largest in the world, is bleeding cash and every producer is feeling the pain, according to the head of the country’s second-biggest mill by output, which raised the prospect that nationwide production may shrink 20 percent.

Losses for the industry totaled 18 billion yuan ($2.8 billion) in the first eight months of the year compared with a profit of 14 billion yuan in the same period a year earlier, Shanghai Baosteel Group Corp. Chairman Xu Lejiang said on Wednesday. Output may eventually contract by a fifth, matching the experience seen in the U.S. and elsewhere, he said.

After decades of expansion, China’s steel industry has been thrown into reverse as local demand contracts for the first time in a generation amid slowing economic growth and a property downturn. The slowdown has pummeled steel and iron ore prices and prompted Chinese mills to seek increased overseas sales, boosting trade tensions. The country is the linchpin of the global industry, accounting for half of worldwide production.

‘Previous Experience’

“If we extrapolate the previous experience in Europe, the United States, Japan, their steel sectors have all gone through painful restructuring in the past, with steel output all contracting by about 20 percent,” Xu told reporters at a forum in Shanghai. “China will eventually get there as well, regardless how long it takes.”

Crude-steel output in China surged more than 12-fold between 1990 and 2014, and the increase was emblematic of the country’s emergence as Asia’s largest economy. Output probably peaked last year at 823 million metric tons, according to the China Iron & Steel Association. The country produced 608.9 million tons in the first nine months, 2.1 percent less than the same period last year, the statistics bureau said on Monday.

“The whole steel sector is struggling and no one can be insulated,” Xu said. “The sector is facing increasing pressure on funding as banks have been tightening lending to the sector -- both loans and the financing provided for steel and raw material stockpiles.”

Losses in China’s steel industry are unprecedented, Macquarie Group Ltd. said in a report on Monday that summarized deteriorating sentiment in the industry. While small mills have already cut production significantly, big mills are still holding out, the bank said, forecasting further cuts.

Peak Steel

“We are talking about output contracting by 20 percent, not just capacity,” Xu said, adding that Shanghai Baosteel Group may be able to report a small profit this year.

As China slowed, some banks and analysts said local steel consumption has topped out. Demand in China peaked last year, Australia & New Zealand Banking Group Ltd. said in a Sept. 21 report. Consumption was seen shrinking by an average of 1.3 percent annually between this year and 2019, according to BMI Research.

The World Steel Association on Oct. 12 cut its outlook for global demand this year, citing China. World usage will contract 1.7 percent this year to 1.513 billion tons, the group said in a report. That compares with an April forecast that demand would rise 0.5 percent to 1.544 billion tons.

“Steel prices have slumped by about 27 percent to 28 percent year-to-date,” Xu said. “So how much further can the steel price drop? I think we are back to the question on how long those loss-making mills can keep producing. If nobody exits the market, the price will fall further. But I think it won’t be like this for too long.”

— With assistance by Feiwen Rong

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