China Steel Mills Take Their Chances

13 May 2016

When falling commodity prices and listless demand forced China's Shanxi Zhongsheng Steel Co Ltd to close in October, it was sitting on roughly enough unsold steel to lay high-speed train tracks from San Francisco to the Mexican border.

A sudden turnaround in Chinese steel prices off the back of government economic stimulus efforts has changed everything. Belying a global steel slump, the firm came back to life, sold its 100,000 tonnes of inventory and now churns out about 4,000 tonnes of product each day, including rebar and wire rod.

Chinese mills like Shanxi Zhongsheng - dubbed "zombies" because they had idled production when prices slumped in recent years - are coming alive just when other countries are seeking restraint in the Chinese output many blame for a global glut of the metal.

China supplies half the world's steel and despite global oversupply, produced a record amount of the metal in March.

Although China has clearly stated its intention to cut production capacity, the equation in steel towns of Shanxi and elsewhere is not so straight forward, showing how difficult it can be for Beijing to tame an industry that has played an integral part in the country's economic rise.

Many mills like Shanxi Zhongsheng re-open as soon as the price is right, under pressure from local authorities conscious that these firms are often the main employer and tax payer in the community. Many other mills cling to life even in a downturn thanks to the support of local governments terrified at the prospect of mass layoffs and being landed with steel firms' debts.

Restarting steel mills can also have other knock-on effects for local business, adding to demand for coke and in turn demand for coal.

"Everyone's kids will grow up, and in China we like to say they're going to all need to buy a home and a car," said Chen Xuewu, who overseas production at Shanxi Zhongsheng.

"That's a guarantee of their basic needs, and it's also a guarantee that there will be steel demand."

The revival of many idled China steel mills is depressing news for rivals from Britain to the United States, which are trying to cope with a surplus of global steel. They already blame cheap and plentiful Chinese exports for killing home-grown steel producers and have threatened trade action.

India's Tata Steel in March said it was pulling out of Britain.

In Shanxi alone, at least 23 mills closed or slashed production in the past year or so, figures from online information portal show. Several are now returning to production.

Even with all the closures, Shanxi produced 38.5 million tonnes of steel in 2015, more than three times Britain's output - and it was China's fifth-biggest steel producing region. China's total production of 804 million tonnes dwarfed that of any other country.

Indeed, Macquarie Research in an April report said sentiment among Chinese steel mills was more bullish than it's been in years - a view reflected by Chen.

"The market might fluctuate, but overall I'm optimistic," Chen said. "Cutting capacity is mainly, for instance, for companies with backward production, whether state-run or private. We're not part of that."

Originally published as China steel mills take their chances


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