China’s steel producers, which account for half of the world’s supply, are still plagued by overcapacity and high debt ratios, even as profits improve, said Wang Liqun, vice chairman of the China Iron & Steel Association.
“The industry is showing a continuous recovery, but the base is not solid because overcapacity issues are not fully resolved,” Wang said at a conference in Shanghai on Friday. “High profits of some products, in some areas, quickly stimulate release of capacity. There are still a lot of difficulties ahead.”
Spot domestic prices for steel reinforcement bar, a basic construction material, climbed to the highest level in almost five years in May amid closures of illegal mills, capacity curbs and infrastructure demand. Member companies of the China Iron & Steel Association reported profits of 23.3bn yuan ($3.4bn) in the first quarter from a loss of 8.75bn yuan a year earlier. Still, a slowing property market may pressure steel prices in the second half.
“Iron ore seems to be already in a downward trend,” Wang said. “We believe the steel market will also see fluctuations in the second half and just hope that the scale of them won’t be too big.”
China’s actual steel consumption climbed 3.6% in the first four months of the year, Wang said. While government data show crude steel output was up 4.4% through May, the figures are inflated as legitimate mills are firing up furnaces to make up for cuts in unofficial output, according to Wu Wenzhang, president of consultancy Shanghai Steelhome Information Technology Ltd.
The nation has ordered tens of millions of metric tonnes of capacity at illegal plants to close, in addition to plans for shuttering 50mn tonnes of official capacity under the nation’s Five-Year Plan. The country had met almost 85% of its official capacity-cut target by the end of May, according to the National Development and Reform Commission this week.
Members of CISA had a debt to asset ratio of 70.2% as of April, down just 0.8 percentage point from a year earlier, Wang said on Friday. Current iron ore prices are “rational” given high port stockpiles, he said. Iron ore with 62% content at Qingdao has dropped about 40% from the highest in more than two years in February and was at $55.23 a tonne on Thursday.