Chinese steel: On the brink of structural profitability
time2017/10/16
Chinese steel: On the brink of structural profitability
Chinese steel producers’ margins have grown fat this year. We think this is partly due to short-term factors, and prices will fall back. However, this is also likely evidence of improving underlying industry health. Moreover, aside from the usual seasonal variation, we expect this to continue and support improved Chinese industry profitability.
90% utilisation signals return of industry health
EAF and BOF capacity eliminations are progressing broadly in line with government targets, while all IF capacity is now closed. Total carbon crude steelmaking capacity therefore fell by almost 240 Mt in the last 3 years, to around 1,020 Mt this year.
In the absence of substantial increases in domestic demand and production, this has been the principal driver of rising capacity utilisation rates, supporting prices and margins this year.
We expect further eliminations of BOF and EAF capacity over the next three years, helping capacity utilisation approach 90% in 2020 - a level consistent with sustained industry health.
Short and long term factors in play together this year
Chinese domestic steel prices have risen substantially this year, and with them margins. To some extent this was driven by short term factors and we expect prices to decline later in the year as short-term supply catches up with slowing demand and speculation is curbed. However, is there more fundamental, longer term support to prices and steelmakers’ margins? Having followed the progress of supply-side reform, and specifically steelmaking capacity controls, we think so. This Insight is the first of a series of five, to be published over the coming weeks, examining changes in Chinese steel industry supply, margins and price, and the impact on other markets.
Government EAF/BOF closures on track
Our current view is that capacity cuts are firmly on track. This outlook is shown in the chart below, and culminates in expected carbon crude steel capacity of around 970 Mt by the end of 2020.