China's unloved steel industry is starting down painful road

18 November 2015

If this pace is maintained for the full year, it implies domestic demand of about 708 million tonnes, and exports of perhaps as much as 110 million tonnes give a total of about 818 million tonnes.

This means that there is still at least 300 million tonnes of spare capacity in the Chinese steel sector, which indicates closures of 50 million tonnes so far this year is only just a start in addressing the supply glut.

While Beijing may be keen to see further rationalisation in the steel sector, it becomes more complicated when the needs of local governments are factored in, as these entities are more likely to try and keep mills open in order to keep employment levels high.

What has been seen in other oversupplied industries, such as aluminium, is that excess capacity takes longer than expected to exit the market, and tends to come back quite quickly when prices improve.

The benchmark Shanghai steel rebar contract hit a fresh record low in early trade on Wednesday of 1,745 yuan ($273.64) a tonne, a loss of 74 percent from its peak in August 2009.

The slumping price will no doubt add to pressures on loss-making steel mills, but it's also likely that if enough do shut and the price rallies, some will restart, thus capping any gains.

If there is a common theme in the current commodity rout, it's that excess supply is stickier than what is logical and that price rallies quickly lead to supply returning.

This suggests there is still much pain to come for Chinese steelmakers, and their global counterparts.