TOKYO -- China's economic slowdown is causing a serious supply glut in steel and other resources, putting downward pressure on prices. Overcapacity is upsetting the global supply-demand balance.
Baoshan Iron & Steel, China's leading steelmaker, on Sept. 25 started operations of the state-of-the art blast furnace in Guangdong Province. The new Baosteel furnace is to produce up to 10 million tons of steel a year. It will churn out close to 10% of the total volume of the metal produced in Japan annually. The supply of semi-finished products and steel sheets will begin from the end of the year.
An executive of a Japan-based trading house that handles Chinese steel said Baosteel's capacity buildup occurred under challenging market conditions.
UBS Securities expects China's crude steel capacity to exceed consumption by 441 million tons in 2015. The supply-demand gap will grow to be nearly three times wider than it was five years ago.
China accounts for half of the global steel production. It produced about 820 million tons of crude steel in 2014. Refineries in China were expanded due to increased investment in construction after the 2008 global financial crisis. The country's crude steel capacity stands at about 1.16 billion tons, up 60% over the last five years.
Growth in domestic demand has slowed in recent years due to sluggish real estate investment. China's crude steel consumption came in at 747 million tons in 2014, falling into the negative territory for the first time in about 20 years. With ever-increasing crude steel production peaking, the capacity utilization rate of China's refineries was about 70% on average, falling by about 15 points over the past decade.
To resolve excess capacity, Beijing urged local governments to curb unregulated capacity expansion in autumn 2013. The country aims to raise its capacity utilization rate to more than 80% by 2017 in its new plan, formulated this spring. UBS Securities estimates that China's crude steel capacity will peak at 1.17 billion tons in 2016. However, steel capacity will remain roughly unchanged and the utilization rate will drop to the 60% range.
Atsushi Yamaguchi, a senior analyst at UBS Securities Japan, said "it will be difficult to cut crude steel capacity substantially as refineries play a key role in creating jobs in some regions."
China is looking for new opportunities overseas. The country's steel exports jumped 26% on the year to 71.87 million tons in the January-August period. Excess steel is exported at cheap rates, pushing down the transaction prices of hot-rolled coils in Asia by about 30-40% over the last year. Cheap imported steel from China caused trade friction around the world. The U.S., for example, began investigations for anti-dumping charges.
Chinese steel companies are also boosting their production overseas. Shougang Group started operations of blast furnaces in Malaysia this year. Hebei Iron and Steel Group refineries in South Africa are scheduled to come online by 2017.
Steel demand is expected to grow in the medium and long term mainly in emerging nations. But according to the Ministry of Economy, Trade and Industry, steel capacity is increasing at a faster pace than demand growth.
The gap between global crude steel capacity and consumption appears likely to widen from 428 million tons in 2010 to 700 million tons this year. It will likely take time before the China-led global steel glut is resolved.