While China often bears the brunt of criticisms for steel overcapacity, the problem is clearly a global one, according to Singapore Exchange (SGX). They estimate that China’s share of global overcapacity is lower than its share of global production. Steel industry consolidation – which has lagged well behind upstream and downstream industries – likely needs to accelerate to help rebalance the market, while over-reliance on protectionist measures may prove largely ineffective over the longer term. Separately, after reaching record levels last month, regional finished steel price spreads have started falling. A few thoughts below.
Steel overcapacity is a global issue. While regional capacity utilisation rates vary, OECD estimates put global steelmaking capacity at 2.37 billion tonnes, versus production last year of 1.62 billion tonnes. Based on recent estimates of Chinese steelmaking capacity at approximately 1.13 billion tonnes, this would imply that China’s share of global overcapacity is around 44% (versus its share of global production at almost 50%). Steel industry overcapacity is clearly a global issue. Also, it is not a new issue. The industry was generally plagued by slow-growing markets and severe overcapacity from the mid-1970s until the turn of the century. While overcapacity shrunk during the boom years last decade amidst surging Chinese demand, in recent years global capacity utilisation has fallen back to around the levels seen in the mid-1990s.
More industry consolidation is necessary. In June 2006, ArcelorMittal CEO Lakshmi Mittal stated that winning companies in the steel industry would have somewhere between 150-200 million tonnes of annual capacity by 2015, and that scale is crucial in the pursuit of value. Following some industry consolidation in the late 1990s and early 2000s, the trend did not really continue and the industry remains slightly more fragmented than it did a decade ago as overall production grew faster than output from the major producers (see tables below). Steel industry consolidation has also remained substantially below upstream raw materials industries as well as downstream industries such as automakers. Historically, the benefits of protectionist measures in steel have been highly questionable and may arguably delay the reduction of industry overcapacity. In the U.S., liberal use of anti-dumping actions have kept U.S. prices (and capacity utilisation) higher than elsewhere, though mills often still lost money due to higher cost structures. In Europe, steel sector subsidies between 1975 and 1990 were estimated at around 1.5% of European GDP. On the contrary, greater industry consolidation may help sustainably reduce overcapacity and enhance the supply-demand balance.
Source: Hellenicshippingnews