Fears of oversupply in the Chinese steel market, the world’s biggest, rose sharply on Thursday after the country’s largest producer suffered a plunge in profits.
Baoshan Iron and Steel Co, the main listed arm of the world’s second-largest steelmaker BaoWu Steel Group, was hit by slowing demand for the grey metal and higher costs. The 46 per cent plunge in net profits to Rmb2.7bn ($400m) in the first quarter compared with the same period last year adds to supply concerns. The possibility of output exceeding domestic demand in China, which accounts for half of global steel production, raises the prospect of the country again using exports as a pressure valve, flooding international markets with excess material and suppressing prices and profit margins for producers elsewhere. The sharp reversal after record high profits of Rmb21.57bn for 2018 was largely due to high iron ore prices in the wake of the Vale disaster, Baoshan said. Benchmark iron ore prices have surged since a deadly disaster at a Vale mine in Brazil in January. The steelmaking ingredient was trading at about $75 a tonne before the disaster and hit $95 a tonne earlier this month. It is currently at $92, according to a price assessment from S&P Global Platts. The Chinese group’s shares fell 4.4 per cent in Shanghai in response to the data and warnings that the country’s steel demand will ease in 2019, with growth worries surrounding the property and car markets — industries that use large amounts of steel. The Chinese car market suffered its first reverse in three decades last year. Baoshan’s prediction of easing demand echoes recent warnings of excessive Chinese steel production from industry officials, after output volumes hit record highs for the first three months of 2019, threatening Beijing’s attempts to keep supply in check. “Driven by high profits [in 2018], there is a very strong desire in some regions and companies to invest in the steel industry and there is a clear impetus towards capacity expansion,” Lu Gui, a Ministry of Industry and Information Technology official told a recent industry conference, according to the official Xinhua news agency. China’s largest steelmakers, fuelled by a buoyant property market and a government campaign to close unneeded factories, defied expectations in 2018 to churn out bumper profits and record production, but prices plunged in the last quarter of 2019, as worries of slowing demand mounted. Stimulus measures from Beijing have helped spur the economy to grow at a faster-than-expected rate in the first quarter of this year. But analysts continue to predict declining steel demand, with use in both construction and automotive sectors likely to outpace an expected increase in infrastructure, according to JCap Research. High iron ore prices threaten further pressure on Chinese steelmaker margins. In the aftermath of the deadly dam burst, Vale, the world’s biggest iron ore producer, closed several of it mines. Although it recently secured approval to restart a 30m-tonne-a-year mine, the iron ore market remains tight. Analysts had been forecasting a broadly balanced iron ore market for 2019 before the tragedy forced a rethink. Vale expects to sell about 320m tonnes of iron ore this year, down from 366m in 2018. Rivals BHP Group and Rio Tinto recently revised production guidance after a cyclone battered their operations in Western Australia. Stuttering Chinese steel demand could spell trouble for steelmakers in other regions given China’s pivotal influence on dynamics in the global industry. Alongside worries over trade and tariffs, concerns about the Chinese market have weighed on the share prices of some of the big steel groups in Europe and the US. ArcelorMittal, the world’s largest producer of the metal, has seen its stock fall by more than 30 per cent since May last year, while US Steel has shed almost half its value. Global steel demand growth is expected to slow to 1 per cent to reach 1.78bn tonnes in 2019, from a 4 per cent rise last year, according to analysts at BMO Global Commodities Research. In the wake of a global commodities slump in 2015, the Chinese government pledged to do away with 150m tonnes of excess steelmaking capacity over five years, as part of broader industrial reform programme. But many steelmakers have also brought new mills online in swap programmes, which means there are mounting risks of oversupply, according to Xu Zhongbo, of Beijing Metal Consulting. “Around May there is likely to be a turning point when demand won’t have picked up but production will be as high as last year.”