China’s steelmakers are smashing production records by pushing furnaces beyond their typical limits, offsetting nationwide closures that may be even more swingeing than government estimates, according to Goldman Sachs Group Inc.
The world’s top producer has trumpeted sweeping reforms in the past two years that have shuttered aging and illegal plants, and shackled winter output in the dirtiest regions. At the same time, official data shows output at record highs. That’s partly because, with demand robust and margins high, mills have rewritten their steel-making recipes to push output beyond normal capacity, says Goldman’s Hong Kong-based analyst Trina Chen.
“For the same blast furnace, mills can deliver an extra 10 percent or more steel than before,” Chen said by email. Operators are using iron-rich ores to boost productivity, and raising the portion of steel scrap in their feed-stock to as much as 30 percent from about 10 percent historically. “The trend is continuing this year but they are approaching their stretchable limit,” she said.
China’s average daily output was a record in June, taking first-half volumes to a best-ever 451 million metric tons, more than half world production. The unprecedented run-rate has yet to trouble a prolonged period of profitability that most analysts attribute to steady demand growth, on top of the reforms driven by President Xi Jinping as a pillar of his economic agenda.
Baoshan Iron & Steel Co., the listed unit of China’s biggest producer, climbed in Shanghai on Wednesday, and other mills advanced after the country’s leaders signaled a fresh focus on bolstering economic growth. Reinforcement bar futures surged to their strongest level in five years.
Goldman said in July that Chinese steel stocks could rally another 60 percent in the next year, and that’s after profits already jumped 151 percent in the first half, according to the China Iron & Steel Association.
China’s capacity has shrunk by about 200 million tons to around 800 million tons, taking into account state-ordered closures and the long-term idling of facilities after the global steel market collapse of late 2015, according to Goldman. Those figures are out of step with the consensus, though. Consultancies Kallanish Commodities Ltd. and Shanghai Steelhome E-Commerce Co. estimate net cuts have been deeper, but that capacity remains at about 1 billion tons, a figure supported by government data.
China's steel capacity is set to decline into next decade, according to Goldman
“We have taken account of steel capacity that went into ‘long-term maintenance’ in early 2016 due to poor profit conditions and bank credit withdrawal,” Chen said. “They remain ‘under maintenance’ until now, which suggests most would not recover despite the improved profit of the industry. This is the major difference between our numbers versus official reported numbers.”
Debate around China’s steel industry is often clouded by doubts over official statistics, and the challenge of gathering accurate data on a sprawling and fragmented industry. The country’s overcapacity problem is “not fundamentally solved,” the listed unit of top producer China Baowu Steel Group said in April. The other end of the spectrum from Goldman includes China Beige Book, a New York-based consultancy that closely monitors Chinese industry. It says steel capacity has actually risen since 2015 as new commissions offset shutdowns.
“The Chinese just claimed they cut hundreds of millions of tons of capacity, and what we’re saying is they actually added it,” Leland Miller, the researcher’s Chief Executive Officer said by phone. The organization conducts regular surveys of 100 or more companies in the steel sector to gauge their investments, hiring and other activities.
For Miller, the industry’s improvement has come, not through supply-side reforms, but from stronger consumption and a wave of speculative demand from investors pouring into steel futures. Recent stimulus promises from Beijing are also fueling hopes that steel’s renaissance will extend through the end of the year as spending on infrastructure picks up.