Benefit of China’s Capacity Cuts— Global Steel Manufacturer Giants Entering Recovery Stage

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Capacity reduction of China’s steel industry not only benefits domestic companies, but also leads to recovery of global steel manufacturers.

According to data from China’s Steel Association, China’s steel companies has achieved profit up to RMB23.284 billion, compared with last year’s loss of RMB 8.778 billion; meanwhile, sales revenue jumped by 40.16%. Based on the sources from media, total capital expenditure of global top mill ArcelorMittal, Posco of South Korea and NLMK from Russia will increase by 29% to USD 6.7 billion, which will be the first increment since 2014.

The core reason for recovery of steel industry lies in improving relationships between supply and demand.

Regarding of supply market, China— the world’s largest steel producer, the projection of continuous capacity cuts and inferior steel elimination in first quarter has promoted the increment of steel price. On the other hand, China’s steel exports in first quarter have slumped due to effect of increasing domestic demand and international trade protectionism. In demand market, global steel demand except in Chinese market will probably increase by 2.4%, compared with 0.7% in 2016, according to World Steel Association.

Chinese Steel Companies Turnaround

The revival of steel industry has driven the turnaround of Chinese steel companies.

The data in recent report by China’s Steel Association shows that membership companies has reached profit of RMB23.284 billion in first quarter, compared with loss of RMB 8.778 billion in 2016. Sales revenue surged by 40.16% to RMB 839.326 billion.

This report also indicates that in overall, the beginning of steel industry in the first quarter is quite good and the market is stable, but some issues still exist.

CSA points out that the profitability of membership steel companies remains at low level, only 2.77% in first quarter. Although the number of loss-making companies drops by 17 companies, there are still 19% companies in the red. Debt asset ratio of membership steel companies is still as high as 69.97% till March 2017, with prominent issues unfacilitated such as difficulty and high cost of finance.

Recovery of Global Steel Manufacturers

While China’s steel companies are switching from deficit into profit, many world steel manufacturers begin to recover.

ArcelorMittal, located in Luxemburg, has reached the highest growth rate in recent 7 years, which is a dramatic change since its credit rating once fell into junk status. ArcelorMittal claims that capital expenditure in this year will jump from USD2.4 million of last year to USD 2.9 million, one part of which will be used in the research of steel of super strength and advanced coating technology.

Similar with ArcelorMittal, POSCO’s last month report shows that the quarter profit has been the highest within 5 years. POSCO indicates that capital spending will increase from KRW 2.5 trillion to KRW 3.5 trillion, injecting capital to clean energy and other business and balancing profit amid gloomy steel market.

Besides, Russian steel company Novolipetsk also states that company expenditure will increase from USD 559 million to its highest point USD 700 million in 2017.

Analyst Mr. Sergey Donskoy of France’s Societe Generale Bank writes in an email that these companies have the same feeling that the worst period has passed and the increasing price and profit are not fleeting phenomenon.

The Benefits of China’s Capacity Cuts

After last year’s production cut, China’s steel industry continues to carry out inferior steel removing plan. Mr. Jingdong Chi, the vice president of China’s Steel Association, says in the information conference that removing substandard steel before the end of June is out of question.

In the news report, CSA indicates that “the trend of a quarter cannot represent the overall trend of one year, therefore whether the output and consumption of one year is increasing or decreasing remains to be seen. Steel companies should overcome short-sighted action, not increase output blindly, be ware that the foundation of up trend of steel industry is not stable, and not slacken off due to misunderstanding that situation of steel industry has changed fundamentally.

Besides, it is noteworthy that China’s steel exports in first quarter keep decreasing.

China’s steel exports declined by 3.5% in 2016 and that was the first slide in recent 6 years. The data of CSA’s recent report shows that China has exported 207.3 million tons of steel in first quarter. It has slumped by 25% compared with that of last year. Since August,2016, single month’s exports have decreased for 8 months in a row compared with the respective month of last year.

Analyst claims that steel exports is related to international trade protectionism and as well as up trend of domestic market and the weakened exporting momentum of steel companies.

Article sourced from Wall Street News.

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