We received this letter from a very large manufacturing company located in the United States. We are unable to identify the company but we think the questions posed to SMU should be aired and a dialogue begun within the manufacturing and steel industry. This is a topic which will be discussed at our Steel Summit Conference in Atlanta at the end of August (details are on our website).
Here is what the manufacturing company had to say:
“…Steel mill production costs should be at historical low levels, since, feed stock and energy costs have been falling for the last several years.
There are many steel insiders that believe that the Chinese cannot afford to stop exporting their steel. The Chinese are concerned with social arrest. Should the Chinese decide to shut down 400 to 500 million metric tons of excess capacity — as they should to balance supply/demand in the global market — the result will be thousands of workers in the welfare ranks and large reduction in tax collection by the Chinese government. Historically the Chinese have had difficulty shutting down old, inefficient, and unprofitable mills because of pressure by the various Chinese municipalities relying on the taxes.
I believe that the Chinese will find ways to continue to export. In the future, we may see Vietnamese, Austrian, Dutch, etc. steel replace the Chinese imports. Probably more and more semi-finished parts will be sourced overseas using Chinese steel and then re-imported in the US.
A logical case can be made to allow the Chinese and others to sell their products at a price below the marginal cost of production. This is basically a huge wealth transfer from the Chinese to the US economy. Thousands of US manufacturing, packaging, and other industries will enjoy lower costs and higher profitability affecting thousands of US employees and consumers.
The Chinese mills have to borrow heavily from the Chinese banks to continue to export. For the Chinese and others this is not a sustainable long term strategy. In the long term the accumulation of debt will naturally drive many Chinese mills into bankruptcy. Meanwhile, the US steel mills could continue to make good profits selling the higher steel grade. I suppose that the US mills are not thinking strategically and are focusing on short term impact.
I would like to see SMU address these points and commend. Also, I would like to see the responses from other stakeholders.
As a buyer I view the market price increase by the steel mills as an “irrational exuberance” based on the US government tariffs and CVD. In my opinion, the global market fundamentals — excess global capacity — have not changed.”
We welcome your thoughts: info@SteelMarketUpdate.com.
John PackardRead more from John Packard
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