TOKYO/SHANGHAI -- Chinese companies are churning out more steel than ever to meet government-driven infrastructure demand ahead of this fall's Communist Party congress, raising fears of cheap exports flooding global markets again once the political event ends.
Total crude steel output in 67 countries and regions rose 6.3% on the year in July, marking a 15th consecutive month of growth, World Steel Association data released Thursday shows. China, which accounts for half of global production, saw output climb 10.3% -- twice as fast as in June -- to another monthly record.
"I think the time has come for the Chinese government to consider an exit strategy," warned an alarmed Toshiharu Sakae, an executive vice president at Japan's Nippon Steel & Sumitomo Metal.
Beijing's top priority ahead of the twice-a-decade party congress this fall is economic stability. The government has invested heavily in infrastructure to keep the economy humming along. The bulk of China's prodigious steel output has been for domestic use, as indicated by a 30% year-on-year drop in exports of steel products in the six months through June.
The government has also cracked down harder on illegal production of substandard steel made from melted scrap. Illicit production facilities equivalent to nearly 60% of Japan's total annual capacity were shut down by June. This has helped stabilize the market, lifting steel product prices to a roughly five-year high.
But the rally has spurred Chinese manufacturers to step up production. If demand drops off after the party congress, other markets could be flooded with cheap exports again.
"Right now, it's unlikely that steel product prices will collapse," said Yuji Matsumoto of Nomura Securities, noting the government's tough stance on overproduction. But steelmakers may not be able to wind down production smoothly once domestic demand peters out. Many in the industry see a temporary price drop as unavoidable.
It was reported Thursday that 25 American steelmakers sent a letter to President Donald Trump seeking curbs on imports, likely with the risk of Chinese dumping after the fall congress in mind. Should such barriers be adopted more broadly, the dearth of outlets for the glut of cheap steel could depress prices further.
In the meantime, however, the earnings of major Japanese steelmakers are rebounding on the back of firm prices. Nippon Steel sees pretax profit jumping 72% for the fiscal year ending March 2018, while JFE Holdings projects a nearly 140% surge. Yet the actual profit figures are not all that impressive -- Nippon Steel's forecast of 300 billion yen ($2.74 billion) is just half the profit that the former Nippon Steel Corp. raked in 10 years earlier.
These lackluster profits owe to a gradual loss of leverage with both customers and suppliers. Toyota Motor cut the price it pays affiliated suppliers for steel sheet to about 4,000 yen per ton. Nippon Steel's shares sank 4% at one point Thursday on the news as investors worried about the potential impact on other products, given that the company has been raising prices to pass on higher raw material costs.
Japanese steelmakers' production is far outpaced by that of Chinese rivals, which churn out eight times as much crude steel. If Chinese demand falls off a cliff after the party congress, Japan's steel industry will need to brace for what could be a massive shock to global markets.