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10-05-2016 12:32

China drives continued steel price hikes

The price of steel has surged 20% to USD $365 per ton in April 2016 from USD $305 per ton at the start of the year. The primary reason for the higher steel price is China's plan to curtail the country's installed steel production capacity by a further 150 million tons over the next five years.

China drives continued steel price hikes

In recent years the steel price has dropped significantly due to the global oversupply, mainly originating from the chronic steel oversupply in China where domestic demand declined amid the nation's economic slowdown.

 

Developments in China have sharply influenced the steel price over the past couple of years. China is not only the world's largest steel manufacturer with an estimated installed annual production capacity of 874 million tons but its domestic market is also the biggest consumer of steel (used in infrastructure and property development). Over the past 15 years global steel-making capacity has doubled led by growing production capacity in China (supported by generous government subsidies). However, in combination with the global slowdown (also led by China) demand for steel declined considerably. In 2008 the steel price had peaked at USD $1,100 per ton, a sharp contrast to the USD $305 per ton at the start of 2016.

 

Many believe the steel price will continue to rise this year due to China's ongoing efforts to curb production capacity. However, when ministers and top officials from steel-producing countries - including China - met in Brussels (Belgium) on April 18th) to discuss measures to tackle the global excess steel capacity further, the participants failed to reach a deal. At this meeting the United States blamed China for the chronic oversupply (which has allegedly led to some 12,000 US steelworkers to have lost their jobs over the past year), while China says such accusations are simply an excuse for protectionism. Zhang Ji, China's Deputy Commerce Minister, said China has already managed to cut 90 million tons of steel production capacity and has plans to curtail it by a further 100-150 million tons. As such, it is doing its best to seek a solution. All in all, the meeting showed a deep division between China and other steel producing countries (similar to the failed talks at OPEC's Doha meeting regarding crude oil production).

 

Excess steel production by China is exported rather than absorbed into the domestic market. The United States has already slapped high anti-dumping duties on steel products from the rest of the world including China, the European Union is thinking of imposing fresh tariffs on Chinese steel. Eventually, these tariffs and trade tension should result in a cut in exports, which will not be a positive development for the steel industry. Moreover, the Chinese government seems committed to addressing the overcapacity in the domestic steel sector. This will deter any new investment in the sector, leading to a fall in steel output.

 

ArcelorMittal, the world’s biggest steel producer, sees a broad recovery in the global steel market after prices for the metal rallied. A recovery in steel would be in the beginning stages for ArcelorMittal, which recently reported a 33 percent drop in quarterly earnings after iron ore prices collapsed last year. Signs of economic strength in China and a broader commodities rebound have started to reverse the plunge in steel and iron ore rose to a 15-month high in April. The recovery they talk of though is not one which will have any immediate impact on the already predicted price rises.

 

Steve Higgs, Production Director

 

For more information contact:

Steve Higgs
Production Director
Tel: +44 (0) 1732 849900
Mob: +44 (0) 7769 183763
Email: stevehiggs@mezzanine.co.uk

Date: May 2016

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