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Home > MEPS Steel News - 04.07.2013

TIGHTER 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 private companies.

Source: MEPS China Steel Review


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