As the world's largest steel producer, every ton China churns out draws attention from metal watchers globally. But what if these reported steel numbers are wrong?
Iron-ore miners, steelmakers and commodity traders closely follow data from the China Iron and Steel Association, published several times a month. According to CISA, China's mills produced 5.6% more steel between January and May from the year before. This is slower than last year's growth—chalk it up to slowing Chinese construction—but still seems decent.
Yet CISA is "plain lying," says a report by Tim Murray and Ada Wang at Hong Kong-based J Capital Research, masking how low the real production is. J Capital says CISA's headline total steel output number doesn't equal the raw data on monthly steel output it separately provides. Another red flag is that 15 companies disappeared in May from CISA's list of the biggest steel firms that counted 92 in April. Production was rapidly falling at nine of these firms.
"Lying" might be overly harsh. CISA itself admits its numbers aren't perfect, and that some steel companies fail to report output from month to month. Still, CISA says it usually gets the industry's trend right. But in its own separate survey of steel companies, J Capital estimated production has fallen 5% in the year through May—reverse of CISA's trend.
This matters because a growing chunk of what China is producing is being sold abroad. South Korea imported 33.6% more iron and steel from China through May, according to Global Trade Atlas, some of which it adds value to and re-exports it to the U.S. Washington slapped duties on Korean steel last week, but the root cause seems to be China.
What's worrying is that the combination of rising exports and falling production implies Chinese domestic steel demand is falling even faster than assumed. Though that would gel with other evidence. China's housing sales fell 9.2% in the year's first half, and construction accounts for more than half of steel demand. The Shanghai price of reinforcing bars, used in construction, is at its lowest in four years.
This should change assumptions at some of the world's biggest commodity firms. China's lower steel use is probably baked into current iron-ore prices, down roughly a quarter this year, but may not be into miners' future expectations. Rio Tinto thinks Chinese steel production will rise by about half between 2010 and 2020, while Fortescue Metals Group FMG.AU -1.93% projects consumption to keep growing the next few years.
ArcelorMittal, MT -1.78% the world's biggest steelmaker by capacity, forecasts China to consume 3% to 4% more steel this year. Arcelor is somewhat insulated because it also produces the auto-grade steel that China's booming car market buoys. Still, if China keeps exporting its steel surplus, world-wide prices of other products such as rebar could suffer.
China's shadow hovering over the world steel market is hard to measure. Investors should be prepared for it to be scarier than they thought.
Source: The Wallsteet Journal
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