As the iron ore price sinks into the $US30s, thousands of Chinese steel mills are engaging in a desperate battle just to stay alive.
For the month of October, 101 members of the China Iron and Steel Association, the peak industry body representing large and medium-sized producers, made a staggering loss of 12.5 billion yuan, down 25 per cent from the year before. In their core steel business, these producers generated a loss of 14.8 billion yuan in the month, down 27.8 per cent from the previous year.
Between January and October this year, they generated 38.6 billion yuan in losses. If you strip out their incomes from non-steel businesses, the loss would be 72 billion yuan. In order to get through the dark winter, Chinese steel mills are reportedly breeding pigs, opening kindergartens and providing plumbing services to improve their situation.
Out of 101 members of the association, 48 producers are in the red. The average profit level for the industry is -1.5 per cent. If this is not an industry in deep trouble, I don’t know what is.
The problem is the mounting gap between supply and demand. During the first 10 months of the year, the consumption of crude steel was 590 million tonnes, down 4.55 per cent from last year.
During the same period, Chinese steel mills produced 675 million tonnes of steel. So the industry created 85 million tonne of excess supply. To put that into perspective, in 2014 the US produced 88.2 million of steel, Germany produced 42.9 million tonnes and Australia produced 4.6 million tonnes.
The Chinese property sector, one of the most important consumers of steel, is still struggling despite a recovery in prices in large cities. The sector is dealing with excess inventory, and it will take years for developers to burn off the supply glut, especially in third and fourth-tier cities. As a result, the price for steel construction material has dropped 33.9 per cent this year.
Apart from the housing sector, many other consumers of steel -- such as the automobile, shipbuilding, machinery and whitegoods sectors -- are also facing strong headwinds. Orders at Chinese shipyards -- the country is now world’s third largest shipbuilder -- have fallen 77 per cent in the first quarter from a year ago.
Shen Wenrong, the chairman of Shagang Group, the country’s largest private steel mill, said recently that he expects production in China to fall further amid subdued demand.
“There is a good chance that the steel production in the country will drop by at least 10 per cent,” he said. “Current production is about 830 million tonnes a year, and it will fall by 10 per cent within the next decade.”
He believes the country’s steel production should be in a range of between 600 million and 700 million tonnes.
“I think this level would be healthy. Even if it drops to 500 million tonnes, it is still healthy,” he said.
But even at a much-reduced level of production, Shen believes the price will remain depressed for a sustained period of time.