Chinese Steel Industry Governed by Shadow Politics & Not Economics

“…it really makes no sense for China to say they are “Calling” for a REDUCTION in exports. It will automatically transpire if you follow what we have been discussing on Dumping Actions against China gobally, but what I can’t comprehend is that the steel mills are NOT going to reduce capacity John, I can advise you without a doubt that the domestic consumption of steel in China will not suffice for a call in reducing exports as there is nowhere else to put the steel John. The domestic market is in turmoil. We now have mills telling us to get orders for products even under dumping action (i.e. wire rods into EU), and since prices in China have dropped significantly, even if some items have 20-30% dumping tariffs, the mills think they can still compete with that inclusive of the levies.
 
“That” on its own should show the level of distraught the mills are having now.
 
“I recall in Jan/Feb of this year, you and I had a conversation where I asked you “Where will China be allowed to sell its steel and what products by the end of 2014 with all of the anticipated dumping actions being filed?” We are at this crossroads right now, and the Chinese mills are scratching their heads as we speak.
 
“Iron ore prices should hover around the USD70/mt CNF FO level John unless something seriously or miraculously happens within China or on the export market.”

Those of you who attended our Steel Summit Conference in early September heard John Anton, Director of Steel Services for IHS Global, speak about his forecast for steel prices in 2015 (peak $750 HRC) which was partially predicated on the Chinese taking steel capacity out of the market. We addressed this issue with our trading source to see what his thoughts were regarding the chances of excess capacity being removed from the Chinese market.

He told us, “It is not impossible for a mill to close down, but almost never seen as they are merged into these new Steel Groups, and while controlled reduction in capacity is possible, it is seldom implemented. Every article you read states “Economic Hard landing to be averted Due to Actions by the Government”, but does it ever go into detail what that really means/implies?? Nope/Never…
 
“John, the Steel Sector in China is the 500 pound Gorilla in the room and it is just too vast for anyone to control. When Provinces may have 2-3 Industrial Sectors and 1 of them being Steel, they are not going to allow reductions in Capacity no matter how illogical that sounds. It will cost jobs, revenues, unrest, untold repercussions in the Banking Sector etc… Why do you think they came up with these Steel Holding Groups??
 
“I would go into the Bonds issued by “MANY” of these Steel Mills at 4.5-5.5% return on 5 year maturity, and having to roll them over to survive, but it would take 2-3 hours to explain. The Bonds are issued and untraded John and Billions of RMB raised on such Junk Bonds. It would blow your mind on the subculture of the Steel Industry in China.
 
“Let’s say you have 20 Individual Steel Mills, and one by one they start to go insolvent. Dominoes affect and chaos in the Steel Sector, but if you put them all into these 4-5 Steel Holdings Group, then what?? It is all Shadow Politics John and has nothing to do with Economics.”