Photo courtesy on Internet
MARCUS GEE AND ANDY HOFFMAN
From Saturday's Globe and Mail
April 11, 2009 at 12:47 AM EDT
FENGRUN, CHINA and TORONTO — Yu Jianshui fidgets in his big leather chair as he chain-smokes his way through an interview. Times are tough at the Tangshan Fengrun Zhengda Iron and Steel Co. Ltd.
With China suffering its sharpest economic slowdown in decades, Mr. Yu, the firm's general manager, complains that he is getting fewer and fewer orders for his main product, huge bars of raw steel known as billets. In his 23 years in steel, “this is the worst I've ever seen.”
Yet under the corrugated metal roofs of his steel mill, blast furnaces still blast and two assembly lines still roll out 3,000 tonnes of steel a day.
It is the same story elsewhere in Fengrun, a gritty steel town where the red flag of the People's Republic flies from giant-like loading derricks. After shutting briefly when steel prices dipped last fall, most of Fengrun's more than 100 mills have come back to life to exploit a price uptick this winter, churning out countless tonnes of pipe, girders, rolled steel and heavy cable.
China simply makes too much steel. The government estimates that China's annual production is about 100 million tonnes more than it should be, a figure equal to the whole annual output of the industry in the United States.
Worse, China has far too many steel companies, more than 700 at last count. Add in iron companies and companies that roll or otherwise shape steel, and the total comes to more than 7,000. Despite repeated government attempts to force them to consolidate into fewer, bigger companies, most of them are still small and inefficient.
By rights, many companies should have closed. Instead, they march on like zombies, China's industrial undead.
That was not such a problem when China was growing at 10 per cent or more a year and demand was soaring for products made in the “workshop of the world.” No matter how much steel China made and how many companies were making it, there was always a market somewhere.
Now it's a problem, and not just for China and its steel makers. In China and around the world, demand for steel is plummeting. Producers are cutting back: Japan's output fell 39 per cent and Germany's 31 per cent in February from the same month last year.
But China's crude steel production in February actually grew 4.9 per cent, even as steel exports hit a 52-month low, falling 62 per cent on a yearly basis. Since last October, most steel makers have been losing money. Prices for Chinese hot-rolled steel fell to about $400 (U.S.) a tonne in March, less than half the peak of $980 a tonne hit last year. Even China's Iron and Steel Association has cautioned that overproduction has risked flooding the market with unwanted steel.
In its latest master plan for steel, drawn up this winter, Beijing says it will force the industry to slim down and consolidate. But such edicts have been issued many times before, and instead, production has continued to proliferate. Few believe this time is likely to be different.
The impact of China's overproduction is being felt around the world. As demand for steel products plunges, China's continued strong production is hurting producers in other countries. Just this week, a group of American makers of steel pipe used in oil drilling filed complaints with U.S. trade officials alleging unfair competition from Chinese imports they say have been dumped on the domestic market.
“That is the challenge of China,” says Michael Willemse, an analyst with CIBC World Markets in Toronto. “They can be very disruptive to the global market if their capacity-expansion plans are not consistent with consumption needs of the industrial economy.”
Further reading at:
http://business.theglobeandmail.com/servlet/story/RTGAM.20090411.wrcover11/BNStory/Business/home
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