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‘We Can’t Waver’: After Frenzy, China Mills Stick With Cuts

Updated on
  • ‘Regulators have moved decisively,’ Li says after clampdown
  • The ‘overcapacity and oversupply situation hasn’t changed’

The biggest steel producers’ association in China says that the country must stick with a government-framed plan to roll back excessive capacity in the world’s top supplier, while praising regulators for quelling a speculative frenzy that lifted prices last month.

“We can’t waver in our target to reduce 100 million tons to 150 million tons of capacity in five years just because the steel price rallied and some idled capacity was brought back,” said Li Xinchuang, deputy secretary-general of the China Iron & Steel Association. “Regulators have moved decisively and successfully to curb excessive speculation.”

Steel prices rallied in China for five months through April as retail investors dived into raw material futures amid expectations that demand was set to improve. The upsurge in speculation was checked by a clampdown from regulators and exchanges in moves that drew praise from investors including Jim Rogers. Li, speaking in an interview on Monday, traced the roots of the rally to cutbacks by mills last year, followed by stimulus in 2016.

The “steel-price rally had its fundamental reasons but speculation exacerbated the move,” Li said in Beijing as he attended a conference. “The steel industry as a whole suffered losses in the fourth quarter of last year, leading to output cuts. The government’s move to bolster growth in the first quarter boosted demand, while exports were also maintained at elevated level.”

Rogers’ View

Steel reinforcement bar futures in Shanghai jumped 21 percent last month as mainland investors piled into everything from coking coal and iron ore contracts to eggs and cotton. The explosion of activity prompted authorities in China to tighten rules, making trading more expensive. The response was described by Rogers as “terrific.”

The government in China is still seeking to chop back oversupply in steel-making and has pledged to eliminate up to 150 million tons in capacity over a half-decade, part of supply-side reforms. Last week, Hebei Iron & Steel Group Co., China’s largest producer, said that it’ll cut capacity in line with the government’s resolve to re-balance the economy.

The “overcapacity and oversupply situation hasn’t changed,” CISA’s Li said in the interview. “We are still in the phase of contraction, not in the phase of expansion, as Chinese steel output dropped in 2015 for the first time since 1982, and consumption fell for the first time since 1996.”

Steel reinforcement bar futures traded at 2,052 yuan a metric ton on the Shanghai Futures Exchange on Monday. That’s down from a closing high of of 2,750 yuan ($421.50) a ton last month. Iron ore futures in China have also sunk after the clampdown.

— With assistance by Feiwen Rong

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