Abstract
Over-supply and price volatility could undermine the recovery in China’s
aluminium and steel industries,
as BMI’s latest China Metals report
forecasts a slow and uneven recovery.
Over-supply and volatile market
conditions have made producers anxious about upsetting a revival of
prices
and profitability, leading to restrained production activity despite rising
demand. Reports that 2mn
tonnes per annum (tpa) of smelter capacity had
come back online in May look exaggerated, with some
analysts estimating
that 1.5mn tpa had been restarted. At the same time, the increase in output
has been
directed at rebuilding stocks by producers and the State Reserve
Bureau (SRB), rather than sales.
Despite problems of oversupply,
China’s aluminium imports reached 362,400 tonnes in April, up 321%
from March according to Chinese customs. The influx was caused by lower prices
on the London Metals
Exchange (LME) compared to higher prices in China,
which prompted traders to exploit the arbitrage
gap, leading to a
temporary surge in imports. Imports in January-May totalled 1.04mn tonnes, up
156.8%
y-o-y. Exports in the first five months stood at 52,622 tonnes,
down 82.9% year-on-year (y-o-y). In
H209, BMI forecasts a rapid decline in
imports due to market saturation. In the long term, the Chinese
aluminium
industry is expected to focus more on the export market, with BMI expecting a
decline in
imports.
In the steel segment, over-supply also remains a
continued source of anxiety, particularly among flats
producers. The fear
is that every time steel prices surge, output is increased, leading to a
sudden drop in
domestic prices. Daily average crude steel output was
1.42mn tonnes in the first four months of the year,
higher than 1.37mn
tonnes last year, indicating an annualised output of 520mn tonnes. By 2009,
China
had total crude steelmaking capacity of 650mn tpa, which meant that
Chinese output was on average
running at 80%, although BMI believes that
longs production was approaching full capacity in Q209
while flats
capacity utilisation was low. Rebar and wire rod prices have picked up on
improved demand
from construction and real estate sectors, but flats have
suffered a sustained downturn.
The government’s push towards
consolidation has prompted some M&A activity. Shougang Iron &
Steel is in
talks to buy a 58.29% stake in Changzhi Iron & Steel as well as stakes in
smaller provincial
operations Xingyuan Iron & Steel and Guiyang Special
Steel. In Q209, Shougang was reportedly in
talks to take over Haixin Iron
and Steel Group, the largest non-governmental mill in Shanxi Province.
Shougang aims to buy up assets in Haixin to sustain its long products business
elsewhere following the
launch of the flat product-oriented Caofeidian
project in 2010 and the permanent suspension of its Beijing
operations.
Haixin Steel has been badly affected by the financial crisis, suffering
plummeting demand and
rising inventories. In November 2008, it closed four
of its six furnaces. Shaanxi Longmen is also seeking
acquisitions of
smaller mills, encouraged by Beijing’s push towards consolidation within
the steel
industry. Its main targets are 1mn tpa bar producer Lueyang
Steel and 1mn tpa hot rolled narrow strip
producer Hanzhong Steel.
BMI
expects that scheduled new capacity could be delayed, while moves towards
consolidation could
lead to the closure of smaller steel mills. With
domestic steel demand set to decline and exports likely to
fall, Chinese
steel output will be lower than in 2008, with BMI forecasting a 6.7% fall to
just under
466mn tonnes. This is still above the government’s target
cap of 460mn tonnes, which means that there is
a likelihood of further
price volatility and financial losses. With 100mn tpa of surplus capacity by
2009,
China may have shut up to 20% of higher cost capacity over the long
term while consolidation will
improve efficiency. As a result, the
recovery in steel production will be at far lower growth rates than
seen
in recent years, with BMI forecasting growth of 5.9% in 2010 and in the
6.5-8.1% range in the
following three years, totalling 615.7mn tonnes by
2013, a 23% increase over 2008.
On the basis of trends within the
automotive and household appliance industries, BMI forecasts a 19%
fall in
aluminium output to 9.8mn tonnes. We expect consolidation within the Chinese
aluminium
industry as a result of the collapse in both domestic and export
demand, leading to the closure of smaller
smelters – representing
48% of capacity by January 2009. As such, 2008 levels are unlikely to be
reached
until 2013, with a sluggish recovery.
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