Thursday, March 08, 2007 12:24:00 AM
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Chinese spike: China will slash steel capacity by 35m tonnes
Ajoy K Das
KOLKATA: China has approved a plan to eliminate 30 million tonne of iron making capacity and 35 million tonne of steel making this year and shut down steel mills with a total capacity of 100 million tonne of iron production by 2010.
This is part of a package of measures endorsed by the National People’s Congress, the Chinese Parliament, to rein in growth to around 8% in 2007, from 10.7%, last year. In other words, the Indian government may have coaxed domestic steel producers to rollback prices this month in its inflation fight, but next time, if it fails to do so, blame it on China.
China has also reduced steel export rebate to 5% from 11%, stoking price fires globally. Spot prices of benchmark hot rolled (HR) coils have spurted in both, the US and Europe.
In the US, HR coil prices are up $10 per tonne at $590 and in the EU, it is up $30 per tonne to $623 per tonne, in anticipation of tightening of supplies in global markets in the wake of Chinese checks on overproduction and exports.
And all these fast-moving dynamics of global steel markets, promising steel prices another bull orbit, are leaving a very big Hobson’s choice for Indian steel companies. They can ignore government ‘wishes’ of holding price line at pricing committee meetings, of respective steel producers, in first week of April and get to ride the next bull run.
Or companies maintain domestic prices and watch rising potential from export realisations as international prices surge ahead of Indian price of steel.
But then Indian exports of steel is just 4 million tonne of total production of 40 million tonne. And steel producers are in no position to ramp up production, ignoring interest of long-term domestic customers and evoking government ire once again in case of shortages in domestic markets.
A highly placed official of Steel Authority of India Ltd (SAIL) said, “Every aspect of steel production in India has global linkages. If pricing is cut off from it, margins can remain positive only for a very short time.”
“Take rising cost of imported inputs. SAIL projects coking coal imports in 2006-07 at 9.49 million tonne compared with 7.4 million tonne imported in 2004-05. If domestic steel prices are not linked to international markets and not factor in the higher input costs like coking coal, either margins turn negative or there is a subsidy to compensate for shrinking difference between cost of production and selling price. And here we are not even talking of generating surplus to fund all mega-capacity creation plans,” officials said.
A senior official from the Union steel ministry said, “The government’s has little room to move in influencing prices in a decontrolled regime. It has used its power of persuasion once. But cannot expect such powers to be effective in face of global trends.”
Industry analysts quoting China National Bureau of Statistics said that fixed asset investment in steel projects slowed down in 2006 to $29 billion, down 2.5% over previous year.
According to reports in The Economist, the Chinese government is moving to rein in Olympics-fuelled property and construction boom to prevent a hard landing of the economy. But despite this, steel demand is poised to grow 13% in 2007.
The country’s National Bureau of Statistics projects that production cuts and rising demand will turn China ‘s 43 million tonne of steel exports to negative.
Simply put, this will make the dragon a net importer once again - that’s another bullish element in the global markets that Indian producers may not ignore when its time for the next pricing strategy.
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