China Steelmakers Seen Facing 'Painful' Reform as Mills ShutBloomberg News
Authorities ready to tolerate defaults, job losses: Goldman
Capacity closures may accelerate as service economy expands
China, supplier of half the world’s steel, is ready to pull the plug on more loss-making plants as an expanding service economy and aging workforce ease the restructuring of heavy industry, according to Goldman Sachs Group Inc.
A price slump and deepening oversupply will drive a wave of defaults in industries from steel and coal to metals and cement, analysts including Yan Yan and Christina He said in a note dated Dec. 6. Unlike in the past, the authorities are ready to implement a “slow and painful” reform of the commodities sector, letting big plants fail and putting thousands out of work.
“With more jobs created by the services industries for the young generation, we believe even with a further rise of unemployment in the old economy, the incentive or pressure for government to support zombie players has significantly reduced,” the bank said.
China’s government is steering a transition from a commodities-intensive economy reliant on infrastructure and investment, to one where services play a bigger role. China’s demand for “capex-related commodities” including steel peaked in 2014, Goldman Sachs said, heralding several years of restructuring to align capacity with demand. Government subsidy growth in the steel industry has been trending down since 2011, it said.
“This, coupled with the further deterioration of steel mills’ cash flow and no further financing support from banks, has led to permanent steel capacity closure,” the bank said. “We expect the capacity closure to accelerate from 2016 onward.”
China’s steel demand is falling for the first time in a generation, with a growing portion of output heading overseas, pushing down global prices for the material used in everything from buildings to ships. Output from China’s mills will drop about 3 percent in 2016 to 781 million metric tons, the China Metallurgical Industry Planning and Research Institute said on Monday.
The price of rebar, a steel product commonly used in buildings, has slumped to its lowest since 2003 in China, when Beijing Antaike Information Development Co. Ltd. began collecting data.
“If the steel price does not recover meaningfully, more steel companies will suffer from significant cash loss and high leverage, leading to production cuts and eventually capacity closure,” Goldman Sachs said. Job losses are less of an issue than in the last serious slump from 1998 to 2000, the bank said, because heavy industry already accounts for a much smaller portion of the total workforce, and many employees are already older.
The prospect of lower steel output in China is contributing to a collapse in iron ore. The raw material will sink below $40 a ton this week as stockpiles rise in Chinese ports, Australia & New Zealand Banking Group Ltd. said.
— With assistance by Martin Ritchie