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Mills revival casts shadow over China steel plans

May. 18th, 2016  06:06 AM     Source: FT Chinese

A mill in central China that can produce half as much steel annually as the UK, has fired up its furnaces on the back of stronger prices, highlighting difficulties faced by Beijing to cut sector capacity.

Highsee Steel, also known as Haixin, was the poster child for China’s debt-laden steel sector when it went dark in spring 2014. Now it is at the forefront of a new trend of mills halting or reversing planned capacity cuts after a 20 per cent jump in steel futures bolstered margins.

The global steel industry fears the influx of speculative buying that pushed Chinese steel futures to levels seen before the 2015 slide is encouraging steelmakers to overproduce once again. Spot prices for rebar in China rose nearly Rmb400 a tonne throughout April to Rmb2,871.

Prices have fallen back again to Rmb2,200 a tonne after authorities damped futures speculation, though production and inventories remain high. The excess steel is already washing into international markets — Chinese steel exports rose 4.1 per cent in April, following a 30 per cent jump in March.

Revived production casts a shadow over Beijing’s plans to cut up to 150m tonnes from its 1bn tonne annual steel capacity over the next five years — a goal that some analysts consider too modest to dent a glut of global production. New regulations are designed to force cuts on mills that do not meet tougher environmental, technical or credit standards.

The case of Highsee Steel shows how local concerns can trump central plans, because of mills’ importance as a bank borrower, taxpayer and employer.

When Highsee filed for bankruptcy in 2014 it sent ripples through the community, recalls local contractor Zhang Weixing: “It was painful when they stopped production.

Many people left to go to find work elsewhere. Now they can come back.”

Highsee sold its flagship 6m tonne mill in Yuncheng, a river city in China’s coal heartland, to private conglomerate Jianlong Group in September to cut debt built up during a decade of rapid expansion and forays into the high-interest shadow banking sector. Jianlong began reheating the blast furnaces on April 30.

Restaurants by the mill gates are packed with steel workers wearing brand-new Jianlong jackets; their safety hats, which are branded Highsee, are a reminder of their old employer.

The mill has brought one-quarter of its production back online to date, according to a factory employee. “If the prices stay high, then they plan to reach full production later in the year,” the employee said.

Jianlong was not alone in increasing production as prices rose. March output reversed 14 months of decline. Crude steel output rose to 71m tonnes, up 2.9 per cent year-on-year, data from the China Iron and Steel Association show.

The initial rally was sparked as industry investors saw an opportunity in low prices, calculating that tight financing meant traditional rebar and iron ore buyers would be unable to stock up. Later in the quarter, looser government policy saw investment flow back into the steel-intensive property sector.


Steel futures rose gradually from the winter until March then took off in April as retail investors piled into the commodities futures markets.

Stronger prices allowed steel industry losses to shrink to Rmb8.75bn in the first quarter, compared with Rmb64.5bn for the full year of 2015. Companies turned a combined profit of Rmb2.65bn in March, says CISA.

Inventory levels, an indicator of how much the industry is overproducing, have also crept up. Inventories at steel mills in eastern China have risen by an average 20,000 tonnes since the start of May, according to MySteel, a steel industry website and pricing service.

As Chinese rebar prices moderate, the bubble that moved from futures markets to physical mills will soon find its way into export markets. That could further inflame trade tensions with the US and Europe just as China is lobbying for recognition as a “market economy”, a status that makes it harder for overseas regulators to assess duties on Chinese shipments.

If the rise in capacity and inventory embodied by Highsee is based on a price blip rather than a recovery in fundamental demand, Chinese supply is likely once again to outstrip demand this year.