China Aims To Revive Steelmaking Without Ordering Cuts To Supply

China is taking a measured approach to fixing its steel industry, improving the outlook for high-end companies but steering clear of ordering the cuts needed to decisively shrink supply.

The readout of China's upcoming five-year plan was heavy on pledges to boost consumption and innovation in the economy. The government's anti-involution campaign — targeting the overcapacity and ruinous competition that's been a feature of the steel sector among others — drew perhaps less emphasis than expected.

Instead, Beijing seems to have committed to a more gradual tightening of the screws on steelmakers that would play out over years rather than months. The industry ministry in October proposed tougher capacity rules, so that eliminating existing operations would have to more than offset plans to add new facilities, at a ratio of 1.5 to 1. Swaps that involve upgrades to plants would get better terms. Some key hubs wouldn't be allowed to add any capacity at all.

Putting limits on expansion, rather than forcing underperforming operations to shutter, won't help most of the mills struggling with China's prolonged property crash. But promoting value-added steel over commoditized items like construction rebar suggests firms that are able to specialize will benefit.

"The future of the industry is looking brighter for the top echelon of producers," said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd. "They could be supported in boosting quality and innovation, in line with China's broader trend to support the upscaling of productive capacity in the wider economy."

China could still announce numerical targets on output or capacity when policymakers gather at the annual National People's Congress in March. Indeed, the punchy rhetoric at the last meeting sparked speculation that Beijing would demand outright cuts to address the overproduction crippling the industry.

That didn't happen, leaving mills to adjust output based on demand — not great, at least domestically — and margins — surprisingly good due to lower raw material costs. The upshot of the tussle is that annual production has a pretty good chance of sinking below 1 billion tons for the first time in six years.

Whatever the intentions for supply, it's demand that's likely to be more influential in shaping the industry's fortunes. The government's five-year plan does mention a batch of major construction projects that could help.

Otherwise, steel exports have been a notable bright spot for Chinese mills, but it's not clear whether that can last as the world tilts increasingly toward protectionism. Goldman Sachs Group Inc. forecasts an 8% decline next year, albeit to the second-highest net volume on record, according to a recent note from the bank.

Moreover, a rising proportion of the steel sold overseas doesn't qualify as the high-end, finished product favored by the government, suggesting room for improvement when it comes to upgrading the industry.

"If you look at what China's been exporting this year, the growth has come from semi-finished steel like billets," said Macquarie Group Ltd. analyst Florence Sun.

Wheat futures in Chicago jumped as China seeks its first US shipments of the grain in more than a year, following orders for soybeans last week as part of a trade truce between the two nations.

Investors' oil supply worries are fewer, with the threat of disruption fading after US President Donald Trump opted not to confront China on its Russian crude purchases, according to Bloomberg Intelligence. China's coal price should drop next year on tepid demand, BI said.

Source: Bloomberg Europe