Chinese Steel Industry Faces Huge Boom

by Fedsteel | Sep 6, 2018 | Our Blog

In the recent past, China’s stock market has been dwindling due to the trade wars with the US. However, steel prices have been indicating a positive state of the economy. Although China is transforming from manufacturing to consumption economy, steel is still an essential part of the economy. For instance, Baosteel, one of the biggest steel manufacturing companies in the country, reported a sixty-two percent year-over-year increase in profits.

The steel market seems undisturbed by the numerous tariffs, internal economic issues, and government controls. For instance, according to the National Bureau of Statistics (NBS), steel production increased by 7.2% in July. Production in 2018 is ahead by 6.3% compared to the records set last year. The growth may have slowed slightly in August as the purchasing managers’ index (PMI) reduced by 1.4% but stayed above fifty percent.

According to the World Steel Association, China accounted for 49.2% of the global steel manufacturing. Recent data indicates that China accounts for 50.7% of the world steel production. China’s output in a month is more than the United States produces in a year.

Lower Production, Higher Prices

In the past three years, the government has been running a campaign to reduce production capacity. This is in attempts to curb environmental pollution. Also, the overproduction has been blamed for low prices and losses. In 2016, the government cut the annual production by sixty-five million tons. In 2018, by fifty million tons.

This year, the government is looking forward to cutting output by thirty million tons. Apart from the cut in production, the government has also been issuing temporary suspensions in the Beijing area. This is to prevent steel factories from producing fog during the heating seasons. However, the suspension that could have cut production by fifty percent is not deterring overall production. This is because production doubled in other parts of the country.

On the other hand, the downsizing and production cut attempts by the government caused steel prices to soar. Some steelmakers increased their production to take advantage of the rise in prices. According to the China Iron and Steel Association (CISA), there was a 14.6% increase in prices at the end of July.

Improved Production Process

Another reason for the increase in production is improved efficiency. Nowadays, most steel mills around the country use better grades of iron ore and more scrap steel to reduce emissions.

The good fortunes witnessed by the steel industry may be a headache to the government. Information from the National Development and Reform Commission (NDRC) pointed out that this year’s targeted cut in production might be difficult if the profit margins continue to grow. However, the government has been able to cut capacity of 24.7 million tons in the first seven months of 2018.

There have been reports that some millers may restart outdated production methods to take advantage of the soaring prices. For instance, many mills that had closed two years ago have recently started reopening due to the increase of steel prices in the market. Research conducted by the Greenpeace East Asia indicated that 73% of the increased capacity came from factories that were presumed idle. There has not been an official government audit to explain the increased production despite the measure put in place to cut output.

Efforts by the government to cut production are faced with a lot of challenges. For example, there have been reports that the price does not control the production of steel. Overproduction is continuing whether the prices are high or low. Additionally, steel production has been thriving even when the GDP is declining.