Despite a huge global glut that led to defaults, closures, and enormous operating losses for producers, Chinese steel prices have been on a tear in 2016.

The rise has been buoyed by lower-than-normal inventory levels, seasonal restocking, producers bringing forward production ahead of government-enforced curtailment later this month, plus a surge in Chinese construction activity.

Front-month rebar futures on the Shanghai Futures Exchange have surged by over 70% since the beginning of 2016, leading to similar gains in iron ore and coking coal prices, key ingredients in the steel-making process.

It has been an amazing, and to many, largely unexpected development.

The scale of the price rally has led to another unexpected outcome — the resumption of production at many previously uneconomic Chinese steel mills, bucking the message delivered by the Chinese government seeking to restructure the sector in order to alleviate endemic levels of overcapacity that crippled profitability in recent years.

According to data released by the China Iron and Steel Association (CISA), Chinese crude steel output surged by over 21% in March to 70.7 million tonnes, the highest monthly total on record.

Reuters, citing a survey from Chinese consultancy firm Custeel, reports that 68 blast furnaces with an estimated 50 million tonnes of capacity have resumed production in China in light of the steel price surge.

Not exactly the response you’d expect given the government’s pledge to cut as much as 240 million tonnes of annual output from the sector in the five years ahead.

Instead, a surge in property construction — deemed by many to be in a glut itself given the years of unsold housing inventory that exists across the country — is creating conditions that are encouraging steel mills restart, rather than shutter, production.

“The government wants to bolster the economy and boost demand for industrial sectors, but it is also resolute to push forward the supply-side reform, putting it in a dilemma,” Hu Yanping, a senior analyst at Custeel, told Reuters.

A dilemma indeed.

For all the talk of rebalancing and restructuring from the government, at the first sign of economic weakness it has turned to credit growth, property construction and industry to boost economic activity, the old growth model that created so many of the issues the economy is currently grappling with at present.

While short term stimulus is acceptable given the mammoth task policymakers face in changing the composition of the Chinese economy, the longer this is allowed to go on, the harder the end task is likely be.

The question many will be asking is whether this is merely a temporary delay to reform and rebalacing, or a sign of things to come.

 

Source : businessinsider.com.au

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