China: What if Steel Prices Decline?

“Last year began with much fanfare over promised government-enforced reductions in coal and steel capacity, and by November the government had declared success. In reality, it would have been embarrassing if the goals had not been reached, considering how modest they were. Taking out the promised 250 million tons of coal capacity was less than the capacity added in the prior year, mostly illegally (and much of this capacity could still reemerge). The more significant impact came as a result of restricting production by limiting the number of days that (mostly state-owned) mines could operate. Coal production fell around 12 percent, but prices are up 80 percent. Great for mine owners, not so great for coal users.

“In the steel sector, a reduction of 45 million tons of capacity still left an excess of several hundred million tons. At the time of writing, steel production is actually up for 2016 (as are steel prices) on growing demand from the construction and automotive sectors. The few announcements of industry consolidation have largely been the big merging with the big to get even bigger. The deals aren’t leading to reduced capacity or higher productivity, and unless steel plants are dismantled, there remains the possibility that latent capacity could return to the market.

“New goals for capacity reduction will be set and met this year, just as they were in 2016—on paper. A slowdown in construction could see steel demand drop and actual overcapacity grow. Steel prices could fall back quickly, pushing the cash flow of many producers—whose balance sheets last year improved enough to stave off bankruptcy—into the negative again, depressing the confidence of consumers in cities dependent on these industries (especially in parts of northeast and northwest China) and creating a vicious cycle of lower consumer spending leading to declining local-business performance and redundancies. In these cities, property prices will be restrained by lack of demand. Homeowners will also be frustrated by their inability to sell and decreases in their paper wealth. As local governments in these cities raise concerns with Beijing, the pressure on banks to keep funding the insolvent (and for the solvent to merge with the insolvent) will rise. It may not happen this year, but eventually jobs will be lost as many companies are simply too unproductive to compete. But that may only be after billions of dollars have been spent keeping them open for a few more years.”

Steel Market Update (SMU) has a couple of new speakers who will take our SMU Steel Summit Conference attendees through the maze of China, Europe and Mexico as we work toward a better understanding as to what is driving world steel pricing (and how it impacts the U.S. markets).

We have added World Steel Dynamics CEO, Philip Englin who is responsible for the development of the WSD Global Steel Information System. He also has steel purchasing experience in his background as a member of the Emerson Electric steel procurement team.

From Mexico we have Santiago Rico who is the head of Strategy for ArcelorMittal Mexico.

Two new speakers on just one topic not to be missed at this year’s SMU Steel Summit Conference.

The SMU Steel Summit Conference will be held on August 28, 29, 30th 2017 at the Georgia International Convention Center which is located adjacent to the Atlanta International Airport (ATL). The cost to attend is $1,250 per person with discounts given for SMU member companies as well as those companies who are sending more than one individual. We expect 500+ manufacturing, service center, steel mill, trading company and toll processor/suppliers to the industry attendees this year. Come join us in Atlanta at the end of August and tell your friends about it.

“This was my third straight year attending the SMU conference, and this year’s conference was the best so far. The variety of speakers provided good insight on the different perspectives of the past, current and future state of the steel industry. I didn’t think that any presentation was exactly the same. I also enjoyed the great networking opportunities. I am excited to attend the 2017 conference.” Darren DeMange, Senior Sourcing Specialist, Crown Equipment Corporation