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Business trends

China steel sector flashes signs of another glut

Overproduction looms despite state-mandated capacity cuts as economy slows

China is poised to produce over 1 billion tons of steel in a year.   © Reuters

SHANGHAI -- Chinese steelmakers are stepping up production at an unprecedented pace even as the government mandates reduced capacity, raising the specter of a supply glut that threatens to spill over the border once more.

Amid the growing concerns of authorities, the general manager of a steel mill in Tangshan, a city east of Beijing, was detained in mid-July.

Tangshan officials had told Tangyin Steel, a unit of steelmaking heavyweight HBIS Group, to halve output over clean air concerns. But the company reportedly ignored it and continued to boost production.

"The authorities, desperate to curb production, probably engaged in the crackdown as a warning to others," a source knowledgeable about the case said.

Tangyin has made a show of complying with the mandate. Following the manager's arrest, digital signage outside the mill's entrance displayed the words "Blast Furnace 2 suspended."

While the authorities "may have shown their degree of seriousness when they went after a major player, there is almost no effort to abide by production cuts at small to midsize companies," a steel market insider said.

China churned out 577 million tons of crude steel in the first seven months of the year. The record pace puts an annual tally of 1 billion tons within reach.

Driving this rush is a steel price recovery that state policy had helped deliver.

A cooling of steel prices until around 2015 had been cause for concern in the global steel industry. The Chinese government began taking the ax to capacity around 2016, lopping off roughly 150 million tons by 2018. Authorities also cracked down on plants that produced low-quality ditiaogang steel made from scrap metal. Ditiaogang is illegal, so it did not show up in official statistics, distorting market prices.

Prices recovered around 2017. But production of crude steel, which had been limited to 800 million tons until 2016, also rose.

A ton of hot-coiled steel now fetches around 3,800 yuan ($535) -- still above the 2,000 yuan levels seen in 2015, but the price is trending downward.

Demand in China is on the wane. New-automobile unit sales missed year-earlier figures for 14 consecutive months through August. The drawn-out trade war with the U.S. has sapped China's consumer appetite. Sales of appliances have underperformed.

The government continues to spend on infrastructure as part of the stimulus program, but the expenditures have not advanced as planned due to the debt-soaked local governments.

While demand has fallen off, the price of iron ore, a key steel material, had jumped at one point. That caused Baoshan Iron & Steel and four other major domestic peers, to record massive declines in profit for the first half.

Ditiaogang steel production is picking up, too. "Tensions between the U.S. and China have been prolonged, and I don't see any signs that the market will recover," an industry source said.

Now the government faces another source of concern. In recent years, Chinese steelmakers shuttered outdated blast furnaces in a quest to cut excess capacity and to help the environment. They also built new blast furnaces with reduced capacities.

Nearly 70% of the new furnaces will be operational between this year and next. The added operational capacity will be equivalent to about 61 million tons in 2019 and 62 million tons in 2020.

"Production capacity has decreased, but unlike the old blast furnaces, [the new furnaces] can run at full capacity, so there is a good possibility that the actual output will rise," a source close to a Japanese steelmaker said.

China's Ministry of Industry and Information Technology says it will strengthen oversight to prevent excess production. But the recent jump in output continues apace, and it is unclear how effective the clampdown will be. As a result, the global steel industry is on guard for another cooling of steel prices stemming from China.

Excess Chinese steel could flow into Southeast Asia and elsewhere, putting downward pressure on the Asian market as a whole. And steel prices in the U.S. have wilted, despite the trade protections put in place, because of soft demand. The concern is that the loss of demand may echo throughout the world.

Iron ore prices have cooled since April. But if production continues to ramp up in China, steelmakers may face a repeat of high materials prices but low steel prices.

"Certain products are heading toward export, and there is no mistake that it will deeply impact steel materials prices in Southeast Asia," said JFE Steel President Yoshihisa Kitano, chairman of the Japan Iron and Steel Federation.

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