Posted on 02 Sep 2024
The disruptive behaviour being displayed by Chinese steel mills currently is severely disrupting market order, according to Jiang Wei, vice chairman and secretary general of the China Iron and Steel Association (CISA). Excessive competition, price wars and the adoption of outdated business models are triggering a race to the bottom, he warned in a recent release on the association's WeChat account.
China's steel industry is facing intense competition these days, with declining steel demand, and a complex external environment, Jiang said. Yet some mills are disregarding the ongoing market adjustment phase and instead, are employing crude methods to achieve economies of scale including engaging in price wars to secure market share, he observed.
This phenomenon has led to a continuous decline in domestic steel prices – when raw material costs remain high – that is causing some mills to now face severe cash flow problems and other issues that are ultimately eroding the steel sector's profitability, he warned, citing CISA data showing that profits among member mills in July had plummeted by 88% on year and by a staggering 90% compared with June.
Since the second half of 2022, China's steel market has been grappling with insufficient effective demand due to economic structural adjustments and a downturn in the property market. This, combined with expanded steelmaking capacity and a lack of self-discipline among mills, has exacerbated the supply-demand imbalance, according to Jiang.
As a result, the industry is witnessing high production, high costs, and high inventories, alongside low demand, low prices, and low profitability. When supply and demand are imbalanced, steelmakers are prone to zero-sum competition, with the result that many steelmakers have resorted to "price wars" once again, Jiang noted.
"To capture limited market share, steelmakers lacking differentiated, high-end products resort to low-price strategies, triggering a race to the bottom that harms everyone involved," he said.
Other contributing factors to the domestic steel sector's current malaise include the industry's low concentration level – with too many small mills and too few major steel groups – and inadequate market-driven mechanisms for eliminating underperforming steel companies that hinder the effective functioning of market forces, Jiang said.
Furthermore, many mills have not yet adopted a high-quality development mindset. While failing to recognize the severity of the current demand downturn, they continue to cling to outdated strategies of expanding production to reduce costs.
Jiang lamented that 'neijuan' – a newly-coined slang word in China loosely meaning ferocious cut-throat competition – had become prevalent in the steel industry and which he blamed primarily on oversupply.
To address these challenges, Jiang emphasized the importance of steel producers exercising self-discipline in production and inventory control, and outlined three key principles that industry members must adhere to, namely production based on profitability, sales based on cash flow, and production based on orders.
Jiang also suggested that long-term solutions require establishing effective mechanisms. These include government efforts to strengthen capacity management, promote mergers and acquisitions to increase industry concentration, and enforce strict market regulations to curb unfair competition.
For steelmakers, recognizing the long-term nature of supply-demand imbalances is crucial, he stressed. They must focus on high-quality development, with leading firms setting an example by prioritizing quality over quantity, he explained.
CISA would continue playing a vital role in fostering cooperation among enterprises, promoting industry self-discipline, and guiding the sector towards sustainable development, Jiang added.
Source:Mysteel Global
