Steelpocalypse: China Steel Industry Losses Explode in Q1, Production Record In March, Trade War Looms

Steel exports from China are becoming a big news story. BBC has a brief roundup here: What's behind China's cheap steel exports?

Chinese steel production has expanded hugely. Over the past 25 years, output has grown more than 12-fold. By comparison, the EU's output fell by 12% while the US's remained largely flat.

The problem isn't 25-years in the making, not even five. China grew steel production in the face of a global economic slowdown that was starting to emerge in 2011. The other factor is China's economy really started slowing in 2014 and there was nowhere left to stuff steel (more than 2 years after the steel traders went bust). The result was a surge of exports. If production fell to 2012 levels, it would exceed all of China's exports in 2015.

WSJ: Chinese Steel Imports Inflame Campaign Rhetoric
NWI Times: Chinese steel production soars to record high

China produced a record 70.7 million tons of steel in March, even as the Chinese government said it would stop subsidizing steel production.

The News: Steel Trade War

The problem, though, is two-fold. Firstly, that capacity closure figure is only around half CISA’s estimate of excess capacity in China’s steel sector, which produces as much as the rest of the world combined.

Secondly, the entire Chinese sector has just been thrown a lifeline in the form of rising domestic prices, improved margins and, for the most financially beleaguered producers, a stay of execution.

The collective willingness to grasp that lifeline explains why the country’s steel output surged last month.

Resurgent steel prices in China are down to resurgent domestic demand and the filling of a de-stocked supply chain in the country.

Mills, in other words, are restarting capacity only because they are being incentivised by “market forces” to do so.

But those “market forces” are directly down to government intervention.

Bloomberg: Warnings Flash for China's Red-Hot Steel Market on 47% Surge

Warnings are stacking up fast after China’s eye-popping steel rally. Fitch Ratings Inc. said prices lifted in part by heightened speculation are destined to slump, while a bank in Singapore flagged the risk of a boom-bust cycle reminiscent of China’s equity market.

The rapid advance isn’t sustainable as mills are expected to bring back idled capacity, raising supply, Fitch said in a report on Monday. Price gains have been driven by a seasonal recovery in activity that’s been exacerbated by increased speculation in the futures market, according to analyst Laura Zhai.

Another wave of export dumping to come, right when the U.S. presidential election is heating up and German steelworkers have already taken to the streets, to name two of the many countries already taking action.

The Economic Observer covers the steel industry today, including brief reports on 18 steel companies and the first quarter report from CISA. The headline reads: Steel Industry First Quarter: Losses Increase 6.6 Times, EBIT Drops 10 Billion (钢铁业一季报：增亏6.6倍至87亿、利税大减100亿！)

first quarter of the market steel prices rebound somewhat unexpected, given agony of Chinese steel companies really brought much good?

The results may be more surprising: China Iron and Steel Association latest statistics show that the first quarter of this year, China Steel Association member steel companies profit amounted to net loss of 8.748 billion, an increase of 7.6 billion from last year's loss, or an increase of 659.51 percent!

Things aren't so bad though, the loss rate is decelerating:

It is noteworthy that, although a substantial increase in the amount of loss, but a loss of the same period has decreased from 51.52 percent last year to 36.36 percent in the first quarter of this year, 15.16 percent decrease year on year.

EBIT also collapsed:

According to CISA statistics, exacerbated by the overall impact of the loss in the first quarter of this year, China Steel Association member enterprises realized EBIT of 5.461 billion, lower by 10 billion from last year, profits fell by 146.52%.

Overproduction has yet to be meaningfully addressed:

Steel Association official said the first quarter of this year, the reason why there have been some new changes in the market, mainly because since the fourth quarter last year, steel production decreased; steel stocks are low; bottom pull up in prices; and the state has increased investment , lowering interest rates and real estate registration policy loosening is expected to improve the macroeconomic environment and other factors.

However, the current problems of the steel industry is still unresolved. Currently the country's crude steel capacity utilization less than 70%, to resolve capacity has not yet started; at the same time, long-standing market concentration is low, disorderly competition and other issues remain unresolved.

The mutual credit guarantees and cross ownership in the industry are having an effect: the Dongbei Steel default has creditors freezing the equity of companies it owns stakes in:

1. Fushun Special Steel: stock have been frozen by creditors to apply for 8 billion bank credit

April 23, Fushun Special Steel announced that the controlling shareholder of Dongbei Special Steel Group and Societe Generale Financial Leasing Co. contract dispute occurred, Societe Generale Financial Leasing Co., Ltd. filed a lawsuit, Industrial Financial Leasing Co., Ltd. to the Tianjin Higher People's Court apply for property preservation, Dongbei Special steel Group company held 330 million shares of tradable shares and fruits (including distributed bonus shares, increase by transferring shares, cash dividends) were waiting to freeze, and 170 million shares of restricted shares outstanding and fruits (including distributed bonus shares, increase by transferring shares, cash dividends) were waiting to freeze. Freeze for 3 years from the date officially frozen into the calculations. The total waiting to freeze shares of the company 500 million shares, representing 38.58% of total equity.

This is the third event from the equity frozen since March 24 Dongbei Special Steel announced the death of its chairman Yang Hua, Fushun Special Steel Special Steel Group, its parent company, Northeast contract dispute caused, arising from either of these three incidents parties are financial leasing companies.

March 29, Fushun Special Steel announced that, due to the controlling shareholder of Dongbei Special Steel Group Co., Ltd. and Far Eastern International Leasing contract disputes occur, the Far East International Leasing Co., Ltd. filed a lawsuit to the Far East International Leasing Co., Ltd., Shanghai Pudong New Area People's Court apply for property preservation.

China Development Bank loaned money to another steelmaker:

3. Xining Special Steel: subsidiary eligible CDB Development Fund replenishment of 80 million, 12-year investment canopy change projects

April 12, Xining Special Steel announced that the Xining Special Steel Co., Ltd. CDB Development Fund, Property Qinghai West Steel Co., Ltd. signed the "investment contract" in recent days, the National Development Fund through open westward steel home replenishment in the form of 080 million yuan for its Xining, Qinghai, Xining Special steel family member courtyard shantytowns investment projects, annual cash dividends, repurchase premiums, etc., in accordance with the highest rate of return on investment is not more than 1.2% / year investment income, investment period is 12 years. After the capital increase, the National Development Fund to open its stake West Steel home is 44.37%. The company invested to 10,030.58 million, 55.63% stake.

4. New Steel shares: 41.8 million dividend, integrated trading subsidiary to expand trade financing

Notice that 2015 net profit of the parent company 66.7 million, 41.8 million dividend plan.

...Under the new Steel shares announcement April 19, the decision to acquire new shares of the new steel Steel Group, a wholly owned subsidiary of Jiangxi Xinyu Iron and Steel Import and Export Co., Ltd. (hereinafter referred to as the "New Steel Import and Export Corporation") all the shares held by the Group of new steel It has a 100% stake in the new steel import and export companies. Aim is to further reduce the company and controlling shareholder of Xinyu Iron and Steel Group Co., Ltd. related transactions (hereinafter referred to as the "New Steel Group") between the positive response to adjust credit policies, the use of import and export financing platform for the company to carry out, to protect the company's normal operations.

...Meanwhile, the new steel shares announced that wholly owned subsidiary of Xinyu Iron and Steel (Singapore) Limited company to be established in Shanghai FTA, investment amounting to 100 million yuan. New steel shares explained that the move is a further advantage of Shanghai FTA policy advantages, to broaden the company's business financing channels, to reduce financing costs.

Batou wants to increase production:

10. Baotou Steel shares: 2016 Target: steel production increased by 500 million tons, iron production increased by 4.38 million tons, 247 million profit plan

April 20, Baotou Steel shares issued report: 2016 company plans to produce 13.05 million tons of iron, steel-producing 12.87 million tons, 12.07 million tons of goods billet, produced 3.6 million tons of tailings dilute the election, niobium tailings 3.3 million tons, 45,000 tons of rare earth concentrates; sales revenue of 29.85 billion yuan, total profit of the company 247 million yuan. Fixed asset investment 4.471 billion yuan.

The 2015 annual cumulative production of iron-clad steel 8.67 million tons shares, steel production 7.88 million tons, 7.71 million tons of goods billet, sales income of 22.501 billion yuan, profits of 3.3 billion yuan net loss.

Related from Bloomberg: Angang Warns of First-Quarter Loss as China Steel Demand Shrinks