BIR World Mirror on Ferrous Metals / Quarterly report - July 2016

PRESIDENT'S OPENING REMARKS
by William Schmiedel, Sims Group Global Trade Corporation

China needs to talk about cuts in steel production, not capacity 

Since our last report, the market has been more stable than the prior period in which we saw a US$ 100 per tonne decline in ferrous scrap prices. We now seem to be bumping along the bottom and looking for a recovery. As we look forward into the balance of the summer, it appears that the market, while not buoyant, should be more stable than in the summer of 2015. This is not to say that all the problems are fixed as China continues to export a tremendous amount of steel products per month, with the June figure reported as 10.9m tons for the second-largest monthly total on record.

This continuing Chinese exportation of their excess steel production will keep a lid on steel and ferrous scrap prices. As we all know, there are many governments putting up barriers to entry for Chinese steel, and more and more trade cases appear to be coming forward with every week. The efficacy of those both enacted and proposed barriers remains to be seen. In my view, the real solution will have to come from China itself.

The Chinese economy has been slowing down for well over a year. One example is that the Caixin PMI index in June marked its 16^th consecutive month below 50. Beijing reports that 45m tons of steelmaking capacity will be removed as planned this year; however, this effort is yet to be realised as we have seen more restarts than closures. One of the first changes needed is for Chinese officials to start talking about cuts in steel production rather than in capacity. The Chinese produced over 800m tons of steel last year but that is nowhere near their 1.1bn to 1.2bn tons of capacity. So capacity cutbacks that have no effect on production will not move the needle.

There have been additional reports of the Chinese government cracking down on those that are taking advantage of the VAT rebate for chrome-added steel and actually not adding the chrome. If this crackdown were to happen, it would give the market some relief. However, the real issue is that billets are being classified as square bars while being exported, thereby avoiding the tariff on exports of billets. This is the single, most major negative effect on our market.

So we need three things to happen: the first is rationalised steel production in China; the second is a major reduction in the manipulation of coding and classifications; and the third, and the most likely of these three to happen, would be a major capital infusion by Beijing into the Chinese infrastructure as this would help absorb the excess steel production.

In the meantime, it will be very interesting to watch and see how the recent referendum in the UK will affect our markets. I think it is way too early to tell what lasting impact it will have.

In conclusion, for those of you in the northern hemisphere I wish you an enjoyable summer and hopefully you will get some well-deserved vacation time. 

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