New | No pain, no gain, for China steel sector wallowing in glut
Painful and costly steel plants and iron ore mines closures are gathering pace in China due falling domestic steel demand and 20-year low product prices
Costly steel plants and iron ore mines closures are gathering pace on the mainland as falling domestic steel demand and product prices hovering at 20-year lows are finally forcing a long-awaited and painful restructuring to curtail excess capacity after a decade of failed attempts by Beijing to push for consolidation.
But it is only the beginning of a long process to restore a demand-supply balance, and next year will be a testing time for local governments wary of social instability arising from plant shutdowns that may require bailouts to cushion the blow on tens of thousands of workers, analysts said.
Although the mainland steel industry has so far this year seen the closure of 50 million tonnes, or 4.4 per cent of total annual production capacity of 1.14 billion tonnes, it is far from enough, according to HSBC’s analysts.
“Under our current forecast [for industry output] to rise 1 per cent next year, we calculate that China needs to cut another 120 million tonnes of capacity next year in order to reach an overall utilisation rate of 80 per cent – a relatively healthy level,” they wrote in a report.
“If output were to drop by 3 per cent to 783 million tonnes – in line with China Iron and Steel Association’s forecast – an additional 160 million tonnes of capacity shutdowns would be required.”
They noted the need to maintain social stability is the biggest barrier for a quick solution to the glut, since massive layoffs could spark social unrest.
