China's Top Leadership Driving Steel Output Cuts, Cliffs Says

  • Supply will drop below 800 million tons this year, CEO says
  • China mills face more opposition to exports, Goncalves says

Steel production in China will extend declines this year as the country’s top leadership has endorsed a concerted push to cut back on overcapacity in the country that accounts for half of global supply, according to the head of Cliffs Natural Resources Inc.

QuickTake Iron Ore Wars

“If the central government has said they want 100 to 150 million tons of steel capacity shut down, they may not get that much but I’m sure they’ll get some,” Lourenco Goncalves, chief executive officer of the largest U.S. iron ore producer, said in an interview. “It’s a decision and it’s a task force led by the Premier Li Keqiang, who’s the number-two guy.”

China’s leaders have vowed to reduce excess capacity in state enterprises including steel even as they battle the slowest growth in a quarter century, announcing targets last month to shutter more factories and help workers cope with layoffs. The excess supply of steel from China has spurred a global glut, hurting prices and devastating profits for mills from Europe to the U.S. Cliffs’ operations include mines in Australia that ship ore to customers in Asia.

“China has been acting during the last few weeks a lot more responsibly, at least talking a lot more responsibly, about what’s going on,” Goncalves said by phone on Monday. “For the foreseeable future, steel production in China will continue to stabilize and trend down.”

Lower Output

As China’s economy expanded 6.9 percent last year, the slowest pace since 1990, crude-steel production fell 2.3 percent to about 804 million tons, according to official data. The country’s steel capacity was estimated at about 1.2 billion tons at the end of last year, according to the China Iron & Steel Association, or CISA, which groups the top makers.

Steel output will drop below 800 million tons this year as demand sinks further and mills face stiffer opposition to exports, Goncalves said. That forecast tallies with the views from Oxford Economics Ltd. and CISA, both of which have said that China’s mills will churn out less this year.

Declining production of steel in China will reduce demand for iron ore, which also faces oversupply after miners including BHP Billiton Ltd. and Rio Tinto Group in Australia and Brazil’s Vale SA boosted low-cost output to defend market share. Ore with 62 percent content delivered to Qingdao was at $43.84 a dry ton on Monday, according to Metal Bulletin Ltd. Prices are up 0.6 percent this year after a 39 percent slump in 2015.

For China to cut between 100 million and 150 million tons of capacity may take up to five years, according to Singapore Exchange Ltd., which cited a survey of more than 100 industry participants. There was skepticism among respondents over the actual impact on production, the iron ore swaps clearer said in a report received Tuesday.

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