Are China’s Steel Capacity Cuts for Real?

China’s steel production outlook

China (FXI) (MCHI) produced 808.4 million tons of steel in 2016. It produced 68.9 million tons of steel products in December 2016, which represents a YoY (year-over-year) rise of 7.1% in addition to November’s 4.7% rise.

Are China’s Steel Capacity Cuts for Real?

The rise in December was China’s tenth straight monthly YoY rise in steel production. Steel production rose by 1.2% in 2016 as compared to 2015, contrary to what many market participants predicted at the start of the year. Most expected steel production to fall in 2016.

Fall predictions

Many market participants are now predicting falls in volumes in 2017. Hebei, China’s main steel-producing province, has increased its capacity-cutting targets for 2017, having announced a cut of ~32 million tons of steelmaking capacity in 2017.

China has been reeling under the overcapacity in the steel industry. While the planned capacity reduction for 2016 was 45 million tons, according to MVS estimates, the figure wound up being almost double, at 80 million tons.

Capacity cuts and steel industry

According to Greenpeace, “Steel production capacity elimination in 2016 exceeded targets, with a total of 85 million tons (Mt) of capacity closed. However, three different factors undermined the effectiveness of the efforts.” These factors included the following:

  • Only 23 million tons of actual operating capacity were idled as most other was already closed down.
  • About 49 million tons of previously idled capacity restarted due to recovery in prices.
  • About 12 million tons of new capacity were added.

If China cuts its steel capacity—which it may have to do, despite its apparent reluctance—there could be better days ahead for the global steel industry.

Sustained capacity rationalization could lead to higher steel prices, which should support iron ore prices. Such a development would also be positive for miners (XME) like Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).

In the next part of our series, we’ll take a look at steel prices in China.