What China’s Winter Capacity Cuts Could Mean for US Steel
Winter capacity cuts
China is taking several measures to address its rising pollution levels. The measures include shutting down the polluting steel, aluminum, and coal capacity. China’s capacity cuts were among the key factors that triggered a rally in global steel prices last year. Higher global steel prices helped US steelmakers like U.S. Steel Corporation (X) and AK Steel (AKS) increase their selling prices.
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Chinese steel prices have also been strong this year. Despite fewer exports and record steel production, Chinese steel prices have risen due to strong domestic demand. During its 2Q17 earnings call, ArcelorMittal (MT) increased China’s 2017 apparent steel consumption forecast to 2.0%–3.0% from -1.0%–0.0%. The steep rise in Chinese steel prices had some Chinese officials raising a red flag about higher steel prices (NUE) (XME).
According to China Daily, citing the CISA (China Iron and Steel Association), “Steel products’ price surge is not due to strong demand or inadequate supply but speculative trading by some unscrupulous market players.” The report also said, “government policies on steel overcapacity reduction, elimination of inferior steel and environmental protection have been over-interpreted and even misunderstood by the market.”
We should note that China’s steel production has been hitting fresh monthly records for the last few months. Some analysts see Chinese production falling in the fourth quarter. In our view, while there could be some moderation in production, it might not be a big fall. While some of the polluting capacity might be closed in the winter months, other operating steel mills could fill in the gap. Global markets might be expecting too much from China’s capacity cuts.
In the next part, we’ll see how the Trump Administration’s policies could impact US steelmakers in 4Q17.