G20 Forum on steel overcapacity… should focus on production.

Ministers at the G20 forum were arguing about whether China’s acknowledged shutdown of 100-150 million tons of steelmaking capacity (more than exists in the entire US market) was enough.  China says it has taken leadership while the rest of the world claim not enough.  We think the argument is being fought over the wrong subject….it’s not the capacity, its the production.

Capacity may have been reduced in China, but it wasn’t the capacity that was operating.  It was already shut down.  That’s why China can claim capacity shutdown of such magnitude but at the same time report that steel production year-to-date in 2017 is up about 5%, and that in the summer that pace accelerated a bit to 6.7%.  How does that happen?  Lots of overcapacity exists, maybe as much as 300 million tons.   Closing half of it is great, but if it wasn’t operating in the first place the impact on steel markets is likely to be nil.

Now if production is reduced by even 5% in 2018, that would have a meaningful impact on global steel in many ways.  It would reduce steel supply by up to 40 million tons, and would probably cut China’s exports in half again or maybe by more (total about 60m tons annually now, down more than 50% from a couple of years ago).

We think steel markets get better in 2018, and part of the reason is expected reforms in China’s oversupply.  The argument about capacity reduction should switch to production growth and the level of net imports and exports.  China has the benefit of command and control, and can affect change quickly.  They also worry more lately about air pollution, and have ordered production cutbacks in Hebei in the Northeast, where over half of the country’s steel is made.

That air pollution concern typically peaks in November – March, when colder air traps noxious fumes near the surface and residents start wearing face masks and driving in the daytime with their headlights on.  That should get more attention than a meeting of ministers in Berlin.  Seeing negative year-to-year producton comps in the months ahead would give quite a lift to steel market optimism.

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