Steel: Bloated Sector Running Out Of Luck
BMI View: Overcapacity will weigh heavily on China's domestic steel industry over the coming quarters, primarily due to contracting growth in fixed asset investment. Weak end-user demand and low prices will maintain pressure on producer margins and we forecast significantly slower production and consumption growth over the previous decade. Central government economic stimulus in the coming months should temper rather than reverse this trend. Meanwhile, reluctance on the part of local governments to curb production by the amount required to address domestic overcapacity and persistently high stocks will continue to encourage exports.
We believe significant overcapacity will continue to undermine China's steel sector over the coming quarters. Stimulus measures from the Chinese government will offer respite for the sector, but this will prove to be short-lived as a number of precarious fundamentals weigh heavily on the industry. According to China Iron and Steel Association (CISA), the average profit margin for 80 major Chinese steel producers reached 0.13% in H113, the lowest among all industries in the country.
We forecast steel production to grow by a modest annual average of 3.7% between 2013 and 2017 to reach 845 mn tonnes (mnt), while consumption will grow by an average of 3.0% over the same period to reach 784mnt. This will mark a drastic slowdown from the previous decade, during which annual production and consumption growth averaged 10.2% and 11.3%, respectively.
|Consolidation A Slow Process|
|China - Steel Production, Consumption & Balance ('000 tonnes)|