Trump's America to Win as China Stumbles, Steel Veteran Says
China to Lose Steel Game as Trump's Agenda Helps Force Cuts
(Bloomberg) -- This year’s Chinese steel price rout heralds worse to come, according to a 50-year industry veteran who says the world’s top producer is poised for a painful contraction as demand tumbles and rival nations build trade barriers.
China’s looming troubles contrast with optimism among U.S. steelmakers, encouraged by President Donald Trump’s pledges to back the industry with infrastructure spending and an ‘America First’ trade agenda. Last week, the Trump administration began an investigation into whether steel imports threaten national security, while U.S. Steel Corp. asked for a probe into alleged price-fixing by Chinese producers.
“We’re going from one world to another,” Peter Marcus, founder and managing partner of U.S. consultancy World Steel Dynamics, said in an interview in Shanghai. “We’re going to have mercantilism that’s going to promote domestic industries. The U.S. is going to win, and China is going to lose.”
Prices in China could return toward the crisis levels seen in late 2015 before the end of the year, Marcus said Sunday. Annual output may shrink by 100 million metric tons in three to four years as domestic demand slumps by the same amount, and as exports fail to hold their explosive growth this decade, he said. China last year made 808 million tons, about half of world production.
‘Zero-Sum Game’
“China’s steel industry is doing an incredible job with great workers, but this is a zero-sum game, and they are in trouble,” said Marcus, who began tracking steel companies on Wall Street in the 1960’s, and has advised some of the world’s biggest mills. The nation’s steel sector faces ‘zugzwang,’ he said, referring to the chess term when a player can’t move without triggering a loss.
China’s steel prices surged at the start of 2017, extending last year’s rebound and giving a rocket to earnings, amid optimism over stimulus and government-backed plant closures to curb supply. But the rally has turned to rout, with the benchmark hot-rolled coil product used in cars and consumer goods tumbling 23 percent in the last two months. Even though the raw material iron ore has slid to a five-month low, it hasn’t been enough to prevent margins at some mills turning negative, according to Bloomberg Intelligence.
“Median-cost producers are already losing $40 a ton. This is a catastrophe for China’s steel industry,” Marcus said, dismissing as “a joke” the government’s efforts thus far to tackle oversupply. “They keep announcing closures of plants that are already closed, we all know that. And the capital spending by medium to larger companies means capacity has been rising. Going forward they will reduce, but it will take pain.”
On Monday, China delivered a fresh warning. Local governments should boost supervision of 29 companies that either didn’t meet previous capacity-cut commitments, or failed to meet environmental or safety standards, the Ministry of Industry and Information Technology said. A further 40 separate companies were told to address issues on environmental or safety standards.
Exports Checked
China’s late-2015 slump in prices and margins saw mills offloading excess supply on world markets. That hammered overseas producers and prompted what Marcus called an “avalanche” of trade protections, most targeting China. There were 47 measures against China in 2015, 39 in 2016, and 11 in the first quarter of 2017, Wu Wenzhang, president of Shanghai Steelhome Information Technology Co., told a conference in Shanghai on Saturday.
“You have all these countries they can’t export to, and it’s an incredible constraint,” said Marcus. Much of the additional export volume since 2010 has fed relatively open, fast-growing regions such as Southeast Asia, but “growth there is limited and there will be more competition in those markets,” he said. Exports fell by more than a quarter from a year earlier in the first three months of 2017 as stronger prices encouraged sales at home.
To contact Bloomberg News staff for this story: Martin Ritchie in Shanghai at mritchie14@bloomberg.net.
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith, James Poole
With assistance from Martin Ritchie