Overcapacity in Steel Market Drives Cooperation

Thursday, November 6, 2008 11:27
Posted in category From the Factory Floor

For years, we have been hearing about the risk of overcapacity in the steel sector.  It was an industry that was early on driven very hard so as to provide the materials needed for China’s boom, but it was one of those industries that was clearly overinvested in to the point the government had to step in on several occasions to slow things off.

However, even with all the reports of the risks of over capacity, it never hit… until now.

According to the article, Traders and mills join hands to survive winter in Hunan:

A dozen of steel mills and traders in Hunan, including Lianyuan Steel, Xiangtan Steel, Pingxiang Steel, Shuicheng Steel and Dahan Logistics have attended a sodality October 26th to discuss the current market situation, and hold out a gesture to link-up with each other to survive the chill winter.

The catalyst for the meeting is best described in the following paragraph:

Rebar and flats price has fallen to some CNY 3,000 per tonne from the peak point of CNY 6,000 per tonne, almost been halved. Our export tonnages post at 50,000 tonnes to 60,000 tonnes a month in the first half, but plummet to merely 2,000 tonnes in October

Where this article has my interest is that this is an industry that really should be on fire, and growing. there are rail road projects, port projects, highways, metros, and a few billion sqare meters of building space all under construction.

Yet, 12 steel mills and traders are banding together to survive?

Something just doesn’t add up for me.

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One Response to “Overcapacity in Steel Market Drives Cooperation”

  1. Rich says:

    November 7th, 2008 at 11:31 am

    FT’s article China steps up steel merger pressure offers more insight into the steel industry.. and the role consolidations is playing in insulating firms from the downturn.

    The Chinese government is trying to consolidate the highly fragmented steel industry to put production in the hands of larger, more efficient mills that cause less pollution, while encouraging small, inefficient and highly polluting mills to close.

    The recent sharp decline in foreign and domestic demand, especially due to a slowdown in Chinese car sales, could help the government reach this long-term goal more quickly after the consolidation’s initial slow start, analysts said.