CREDIT MAY BE A BLESSING IN DISGUISE FOR CHINA’S STEEL SECTOR
The Chinese steel sector has been living in a fool’s
paradise for most of this year. Many of the mills have been making losses.
Despite this, they continued to produce more than market requirements. The new
tighter credit measures, announced by the government on June 25, are likely to
have a negative effect on the steelmakers’ order books.
This new initiative by the authorities is likely to engender more realism into
an industry which has operated in an irrational manner in recent times. Perhaps
an extended period of low prices, weakening real demand and even greater losses
will focus the minds of both the regional and national governments that urgent
action is required to restructure the industry.
The steelmakers have chosen to oversupply the market irrespective of the
consequences that this strategy would have on steel selling values. We hear of
spurious arguments that the companies will lose more money by stopping
production than if they continue producing. The mills also cite that they need
to maintain output to avoid losing market share.
What these mills fail to recognise is that oversupply leads to a decrease in the
general level of price across the whole sector. The result will be that more
losses develop. We have seen the closure of two steel plants in recent times.
Many more bankruptcies will follow if the current situation continues.
This random form of downsizing is not good for the industry. It needs to be
undertaken in a rational manner. The most inefficient and high polluting plants
need to be highlighted. These should be the candidates for closure.
The decline in steel prices highlights a problem that MEPS has been indicating
for some time. Many mills are not in direct contact with the end users of the
products that they produce. The connection between supply and real demand for
steel has been broken by the proliferation of a whole host of dealers, traders
and stockists in the supply chain.
Easy credit has enabled the real estate market to continue to flourish in the
recent past. The government could not allow this sector of the economy to spiral
out of control. The time has now arrived when action needed be taken to rein in
growth in the real estate sector.
The action to impose tighter borrowing conditions is likely to reduce the rate
of growth in real estate demand. It is probable that most of the manufacturing
segment will also be adversely affected. Reduced order tonnages for the steel
sector will, almost certainly follow.
The new credit restrictions will also limit the mill’s ability to fund higher
inventories - particularly for reinforcing bars and wire rod. The result of this
course of action will, almost certainly, bring a sense of reality into the
steelmakers’ decision making about whether to continue with the current strategy
of maintaining high production rates at their plants.
It would appear that at this time much of the state owned steel sector is acting
rationally by regulating supply. The problem seems to be greatest with the
Source: MEPS China
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