2015-12-04

Chinese Steel Production Will Not Stop Until It Must

FT Alphaville: China’s steel industry has its own take on your so-called *law* of supply and demand
It was also emphasised that mills are concerned about losing market shares and having to spend fresh capital to resume operation if they stop producing now. It’s therefore a prisoner’s dilemma that has prevented some capacity from being shut down. It can actually be argued that banks are also part of this game – as mentioned by a steel trader, banks have been pushing mills to stay in the market so they don’t have to admit large bad loans; the iron ore trader also said that for some mills, loan renewal for next year has already been completed, which means the seasonal tightness in liquidity towards year-end may not be as tough as we imagined.
Every local government and creditor has an incentive to keep the mills running. This is literally a game of musical chairs and at the back of everyone's mind is the hope that the government might add more chairs.

Also, if mills have already rolled over loans, then the prediction of bankruptcies covered in Chinese Steel Industry "Sliding Into The Abyss"; Chinese New Year Could Bring Mass Bankruptcies may be put off for another year. Steel prices will weaken, the debt situation will be worse and a year from now, protectionism will be in place or a near inevitability in many countries.

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