It seems that mainland’s chronically oversupplied steel
sector will take years to restore balance in its demand-supply equation.
According to the latest data released by the National Bureau of Statistics
(NBS), in the first quarter of 2019, China's crude steel output stood at 231.07
MnT up 9.9% y-o-y basis. The country’s crude steel output in March 2019 was
recorded at 80.33 MnT registering a surge of 10% against March 2018.
While the country’s steel output hit a new high in Q1
2019, the performance of steel companies was worrisome. According to the
statistics, as of now, five listed steel companies being Ansteel Group, Hunan
Valin Steel, Liugang Steel, Shaogang Songshan Steel and Tisco Stainless Steel
have successively released their first quarter results for 2019, and the net
profit attributable to listed shareholders has shown a downward trend, with
Valin Steel’s profits registering a decline of 25%-32% and the remaining four’s
profits recording a plunge of about 70%.
Although each of the companies mentioned in their
performance report that the market situations such as falling steel prices and
high raw material costs were the main factor for the plunge in their profits in
Q1 2019, the industry experts are of the opinion that such a situation may not
be a short-lived and a new round of overcapacity in China's steel industry is on
its way.
The re-emergence of excess capacity
After the previous round of de-capacity that involved
removal of “strip steel-substandard steel by mid-frequency furnaces”, new
capacity filled the gap. Specifically, the increase in production capacity occurred
in the following cases:
1. Restructuring of industry layout such as inland
capacity shifting to coastal areas
2. The relocation and reconstruction. If the new capacity is strictly
controlled according to national regulations, new capacity should not have come
up. However, although this didn’t happen, the existing capacity in the actual
operation was enlarged by the local governments and enterprises.
3. Sub-standard strip steel mills, which by the time when production was
required to stop, have already applied for EAF capacity.
This virtually led to a new round of steel capacity
reconstruction. According to current statistics, the newly added steelmaking
capacity will reach more than 200 MnT in the next 2-3 years, which will result
in a new round of overcapacity.
After completing the target of the curtailing excessive
capacity, some capacity replacement projects will start production starting
from this year. At the same time, enterprises that have experienced
difficulties in the past few years have resumed production through
restructuring. As a result, capacity has begun to expand. Along with this
construction of some of the illegal capacity was completed and put into
production under various names including the demolition of small capacity to
build bigger one in return, engaging new project in the name of capacity
replacement, the resurgence of 'strip steel', and the resumption of phased out
capacity etc.
Some expert believes that the risk of overcapacity in
China's steel industry has begun to increase again. The crude steel output in
the first quarter increased by 9.9%, indicating that this risk is beginning to
emerge and this will grow even more difficult to supervise once the market
turns better with irresistible temptation for steel mills.
Lucrative profits motivate steel companies to increase
production
It is worth noting that there is no authoritative data
showing the increase in production capacity, but the ambition of steel
companies has been fully reflected in production. In 2015, China's steel industry
entered a “freezing period” and the whole industry fell into a loss. In 2016,
the Chinese industry took the lead in entering the supply-side structural
reform, and the “de-capacity” policy was launched.
However, while capacity was gradually removed, from
2016 to 2018, China's crude steel output grew by 1.2%, 5.7%, 6.6%. y-o-y
respectively. In the past three years of burgeoning production, industry
profits have become increasingly agreeable. In the year 2018, the profit per
tonne of steel once broke the point of thousand RMB. Subsequently, no company
wanted to back down in front of profits.
The warning ahead
Recently, Liu Zhenjiang secretary general of the China
Iron and Steel Association (CISA), pointed out that driven by the profits, the
impulse to re-ignite the “strip steel”, the disguised growth of capacity and
the excessive release of compliant capacity are indeed phenomenal. If the
capacity is not controlled, even if the steel demand increases, it will be
overwhelmed by the new capacity.
He emphasized that if the growth rate of demand is less
than supply, the inertial growth of output and profit-driven growth will
aggravate the contradiction between supply and demand. Therefore, this year we
have to keep an eye on the output, otherwise, there will be an imbalance of
supply and demand again.
Although the solution will be mergers and acquisitions
of companies this will not come until a new round of overcapacity brings about
damage to steel manufacturers. Also at present, production capacity is equipped
with advanced, world-class facilities with environmental protection up to
standard, so that in the future, capacity removal will not be done by following
the current pattern.
Source: steelmint.com