China steel mills now consider sales more than profit

Steelmakers in China are so determined to unload a mountain of unwanted metal on the world that profit has become less important than sales.

After years of expanding capacity to keep up with surging demand at home, Chinese mills that account for half the globe's output are shifting to buyers across Asia, Europe and the Americas as the domestic economy slows. Fuelled by lower prices, steel-product exports are up 25 per cent this year through October to 92 million metric tons, sending mill losses this year to as much as $US537 a ton, data compiled by Bloomberg Intelligence show.

The onslaught has compounded a global surplus that probably will last for years, Standard & Poor's Ratings Services estimates. In India, where the government imposed a 20 per cent tax in September to slow a surge of cheap imports, Chinese mills just cut prices to keep shipments flowing, which means they are probably losing about $US90 a ton, according to Mumbai-based JSW Steel. Low-cost supply from China in Europe forced producer ArcelorMittal to reduced its profit forecast and suspend its dividend, while top US steelmaker Nucor idled as much as 35 per cent of capacity.

"The problem with China is that they want to sell at any price, not withstanding the losses that they are incurring," said Seshagiri Rao, the chief financial officer at JSW Steel, India's third-largest steelmaker. That's an "unfair trade" strategy, Rao said.

Top steelmakers in China insist otherwise, noting that overcapacity is a global issue that will take time to work itself out.

"China does not encourage steel exports, and Chinese steel mills produce and sell their products in the fully competitive market," said Zhu Guangsheng, an official at the China Iron & Steel Association who handles media queries. "To simply attribute the difficulties in one country or region to Chinese enterprises is not responsible," Zhu said in an interview Thursday, citing a November 25 statement from the group.

India's government signalled Wednesday more curbs on steel imports will be introduced within weeks. The basket of products that face the 20 per cent safeguard tax may be widened, according to Steel Secretary Aruna Sundararajan, who said the country may also impose anti-dumping duties.

Regulators in other countries also are acting. A month ago, the US Department of Commerce proposed a 236 per cent duty on imports of corrosion-resistant steel from five Chinese companies, including Angang Group Hong Kong and Baoshan Iron & Steel. At the time, Baoshan called the levy unfair and said its pricing was based on market forces.

Tata Steel has closed the last blast furnace in Northern England, shedding 1200 jobs, citing high energy costs and cheaper imports. The European Steel Association, known as Eurofer, said that as long as China pushes its surplus on the global market, "traditional trade flows will continue to be distorted, fuelling the fight for tonnage, discounting while leading to margin erosion".

Chinese mills can afford to undercut competitors because the government provides export rebates and subsidies for production, Cola said. Hot-rolled coil, a benchmark for steel, cost $US284 a ton in China, while the same product fetched $US330 in the US and $US420 in India, according to data from Metal Bulletin.

Slumping global prices have been a boon to manufacturers, who say Chinese supplies remain an attractive alternative because they are so much cheaper than domestic steel.

Even with a surplus, Chinese producers have been slow to adjust output. Many steel companies are owned by regional governments that have "significant reluctance" to closing plants or reducing capacity, because that would mean cutting jobs at a time when the economy is slowing, according to a November 30 report by BMI Research.

Over the past two decades, China expanded capacity as the economy grew at more than 9 per cent annually and the country became the world's largest metals user as it built cities, cars, bridges and consumer goods. Crude-steel output surged more than 12-fold between 1990 and 2014, and probably peaked last year at 823 million tons, according to the China Iron & Steel Association.

While production has begun to decline, demand is falling almost as fast, with the economy expands at the slowest rate in a quarter century. Domestic use will slide 3.5 per cent this year to 685.9 million tons, according to the World Steel Association. With a growing domestic surplus, Chinese exports will top 110 million tons this year, more than Europe's top four producers combined, Bloomberg Intelligence estimates.

The glut forced Japan's two largest producers, Nippon Steel & Sumitomo Metal and JFE Holdings, to cut their profit forecasts for this financial year as they reduce export prices to compete with Asian supply.

"We don't think the industry's overcapacity will be resolved anytime soon," said Katsuhiko Ota, executive vice president of Nippon Steel. "The current conditions will likely continue until structural reforms are conducted. The global steel industry will face very tough times."