Overproduction In the Steel Industry: A Global Problem

The global steel industry is facing some serious issues of overcapacity and, like the aluminum industry, so much comes down to China.

A recent Telegraph article quoted World Steel Association figures saying that production in April was 132 million tons, an increase of 1.2 percent year on year. Modest growth, you might think, but look a little deeper and yet again, the new production is heavily skewed to China.

“This growth is almost solely attributable to China, where 6.8% more steel was produced in April than in the same period last year,” the article said, noting most key producing regions reduced output, so China’s market share of worldwide steel production climbed to 49.8%.

Morgan Stanley, quoted in the same article, agrees, saying the bulk of overcapacity is in China and Europe. The long-term trend is for slower global growth in steel demand, suggesting that 3 percent per year is likely to be the norm over the next five years, compared to 5 percent over the last 10.

The bank reported China’s overcapacity is some 200 million tons. Cutting production by such an amount would involve 800,000 redundancies or 20 percent of the steel industry’s workforce, a step the new administration is unlikely to take.

Given that steel is not hindered from being exported from China by tariffs, like aluminum, metal is flowing into the international marketplace, a trend that is likely to increase as domestic demand softens more.

China’s manufacturing sector shrunk for the first time in seven months, suggesting the economy is more fragile than previously thought. Steel producers such as ArcelorMittal have already called for barriers against Chinese imports into Europe, saying cheap imports are adding fuel to the fire of already-weak demand and domestic over-production, leading major steelmakers there to post losses for the first quarter.

by Stuart Burns