China Re-Opens Steel Production 10 Times Greater Than Australia

27 April 2016

Easy credit and an increase in government spending has led to the re-opening of at least 41 Chinese blast furnaces shuttered last year, as producers on the mainland reap their best profits since 2008.

Despite an over-supply of steel globally and an increasing number of countries levying anti-dumping tariffs on Chinese exports, domestic producers have moved quickly to ramp up production.

Research house MySteel estimates around 50 million tonnes of Chinese capacity has been re-started this year, the equivalent of 41 blast furnaces with an annual capacity of 1.2 million tonnes.

The restarted capacity is more than 10 times Australia's total production and accounts for most of the 60 million tonnes China shut in 2015.

The closures were part of government efforts to modernise the sector, reduce air pollution and cut over-capacity.

"The market is so good why would steel mills not re-open?" said Xu Xiangchun, the chief information officer at MySteel via phone.

"Only the mills which were torn down or had serious debt problems have not re-opened."

The latest to re-open is the privately owned Songting Steel, in the industrial town of Tangshan outside Beijing. It has a production capacity of 5 million tonnes and was closed in November last year due to the low price of steel and high debt levels.

Stockbroking firm Everbright Securities estimates the average Chinese steel mill is now making a profit of 400 yuan per tonne of steel produced, the highest level since 2008.

The price of reinforcing steel bars, used in construction, have rallied more than 50 per cent since mid-February to the highest level since August 2014.

The iron ore price has staged a similar rally, although it has fallen back in recent days to be trading around $US64 a tonne. This is well above most forecasts by analysts, who predicted the iron ore price would be trading around $US40 a tonne for most of the year.

Despite the recent rally many still doubt the price of steel and iron ore can be sustained at current levels.

"In the short term the market will be good, but the rally will fade by the second half of the year," said Li Xinchuang, from the government backed the China Metallurgical Industry Planning and Research Institute.

He is still forecasting China's steel production to decline by 3 per cent this year, to below 800 million tonnes.

This is despite a 3 per cent rise in steel production during March, the first monthly increase since January 2015 and very close to the country's record monthly output. There is speculation April's production figures will be the highest on record, even as the government continues to talk about shutting down outdated steel mills and reducing over-capacity.

Mr Xu from MySteel said the strong steel production figures were being driven by a pick-up in property construction and infrastructure projects across China and the government pushing more credit into the economy.

"I think the government will tighten up on the property sector so it's hard to see the rally continuing," he said.

China's local media is reporting state-owned steel mills saying production has increased, but they are yet to see a corresponding pick-up in demand.

China's increased production has seen the United States, European Union and Australia levy anti-dumping tariffs on Chinese steel.

On April 23 Australia said it would place a tariff of between 11.7 per cent and 30 per cent on Chinese made rebar.


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