Indian steel cos unlikely to gain from Chinese production halt

31 August 2015

China is set to halt production of steel for over a week but this brings cheer neither to Indian steel makers nor to iron ore miners.

According to reports in Wall Street Journal and Chinese news agency Xinhua, Beijing has ordered factories to remain shut or cut production from August 28 to September 4 in preparation for a parade to mark the 70th anniversary of the end of the Second World War, on September 3. With the idea of having clean air for the dignitaries, it has also ordered construction work stopped.

Too short a shutdown

Senior Steel Ministry officials, who are monitoring the situation, say domestic producers can benefit only if the shutdown is for a longer duration.

China is the world’s largest steel producer. According to the World Steel Association, between January and July this year, the country produced 476 million tonnes of crude steel, 1.8 per cent lower than in the same period last year. In calendar 2014, China produced 822.7 million tonnes of crude steel.

“A shutdown of 7-10 days won’t have a major impact on our situation. Imports will continue from South Korea and Asean countries that have free trade agreements with India. Also, even if production is cut, Chinese inventories will continue to flow in,” an industry official said on condition of anonymity as details of China’s planned shutdown are yet to emerge.

“Production has cooled in recent months, but there is still so much overcapacity that the pressure on global prices is unlikely to lift anytime soon,” the official added.

Miners could be hit

On the other hand, India’s iron ore miners, including Vedanta Ltd, could be hit by the Chinese shutdown as it will lead to a pile up of the mineral at ports, which would depress global prices of the mineral.

Global iron ore prices, which hit a high of around $191 a tonne in 2011, have since crashed and settled at around $50/tonne this year.

However, analysts expect iron ore prices to fall further as the mineral piles up in China during the temporary shutdown; prices have already touched a low of $44.10/tonne.

Vedanta, which recently re-started mining iron ore from Goa, said that it expects a price of $45 a tonne in the export market, which would be enough to maintain positive cash flows.