Oxford Economics warns of deeper cuts in largest steel maker

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The downturn in China’s steel industry will intensify this year as output contracts by more than the drop seen in 2015, according to Oxford Economics Ltd.

Poor local demand, stiffer opposition to exports and tumbling prices will combine to spur deeper cuts to output in the world’s top producer, Louis Kuijs, Hong Kong-based head of Asia economics, said in an interview. That’ll contribute to weaker iron ore prices, he said.

“The demand prospects for Chinese steel companies are pretty meager, so you’d expect them to cut supply,” Kuijs said on Wednesday. “It’ll have to fall by more than” last year, said Kuijs, a former World Bank and International Monetary Fund staffer who’s tracked China since 2004.

Mills in China, which account for half global output, are battling losses, overcapacity and sinking prices as the economy slows, and data on Tuesday showed crude-steel production shrank 2.3 percent in 2015 to post the first annual decline since at least 1991. The slump is hurting iron ore and boosting trade tensions as mills seek to sell surplus steel overseas. Kuijs said there was now greater urgency to reform the industry.

“I’m not very optimistic about domestic demand for steel and it’s simply not possible to offset this by exporting more,” said Kuijs. “If the capacity isn’t cut then we’ll continue to be in this situation where loss-making companies either just keep on going because they want to hold up market share, or they keep on going because they’re asked to do so by the local government.”

Steel production in China totaled 804 million metric tons last year from 823 million tonnes in 2014, according to official data. Citigroup Inc. has forecast that output will contract to 788 million tons this year, while the China Iron & Steel Association sees a decline to about 783 million tons.

As China’s government steers a transition from a commodities-intensive economy reliant on investment to one where services play a bigger role, it’s seeking an overhaul of its bloated state-run businesses. Goldman Sachs Group Inc. has said that authorities may be ready to pull the plug on more loss-making plants and put thousands out of work.

“In terms of size and intensity of problems, I think steel is really the poster child,” said Kuijs. “I’d want to see first some more high-profile steel companies either being closed down or cutting their capacity radically before I become convinced that we’re going to see that progress in 2016.”

The prospect of lower steel output in China is contributing to a collapse in iron ore. The raw material is trading at less than a quarter of its 2011 peak, having reached a new low of $38.30 last month as the largest miners including Rio Tinto Group and BHP Billiton Ltd. in Australia boosted supply. Ore with 62 percent content delivered to Qingdao was at $41.61 a dry ton on Wednesday, according to Metal Bulletin Ltd.

“They’re trying to cut costs, increase productivity in their industry to basically crowd out other suppliers,” Kuijs said. “The more we get this kind of behavior on the supply side, the more you’d expect iron ore prices to continue to fall in the context of pretty weak demand from China and globally.”
Source: Bloomberg

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