China Retaliates In Trade Wars - Increases Steel Output To Record High

A funny thing happened when US slapped a major tariff on China's steel exports... prices exploded higher. But the almost 50% surge in steel prices since mid-December back to 15-month highs have left traders equally split on what happens next. Will record production levels exaggerate a global glut amid tumbling exports and rising tariffs, or will China's trillion-dollar surge in credit fuel yet more so-called "iron rooster" projects driving domestic demand even higher. For now, it appears the former is more likely as US Trade reps suggested further protectionism looms.

Since Dec 23rd 2015 when the US imposed a 256% tariff on Chinese steel imports, composite steel prices have soared almost 50% even as exports have slipped...


Faced with collapsing exports and a lack of domestic demand (and surging inventories) along with zombie steel mills on the verge of bankruptcy and desperately in need of cash flow or else China's whole red ponzi would fail, the central planners unleashed a trillion dollars of new credit in Q1...



Which enabled, among other things, the so-called "iron rooster"-stimulus program:

Mills now have their order books filled till July or onward,” said Li Qibao, an analyst at Changjiang Futures Co. in Wuhan, who predicts that prices will go on rising.


There are “unmistakable signs of recovery in demand, with the help of an ‘iron rooster’-style construction boom that has come back at full speed,” Li said, referring to a nickname for China’s previous growth model as the Chinese pronunciation of the phrase translates as ‘railroad, highway, infrastructure.’

As Bloomberg reports,

The unexpected rebound in China’s steel market this year is set to keep rolling because record output by mills has so far failed to replenish inventories as the government cranks up stimulus to boost growth.


Stockpiles of steel reinforcement bar, used in construction, sank for a sixth week, contracting 6.8 percent in the period to April 15 in the biggest drop since October 2014, according to Shanghai Steelhome Information Technology Co. Rebar futures in Shanghai rallied to the highest in a year on Tuesday, and are up 39 percent in 2016. Spot prices have risen 46 percent.


The rally in 2016 follows five straight years of declines and has been a welcome respite for the world’s largest steel industry, which has been grappling with overcapacity, losses and forecasts for a long-term drop in the nation’s demand. In March, mills in China churned out more metal than any month on record as the economy stabilized, with a surge in new credit spurring a property sector rebound. The surprise rally in the biggest steel producer has also helped to lift global iron ore prices.

And that explains the surge in price (domestic demand) despite global weakness and inventory glut...


However, there is a dark side to all this credit-fueled Reuters reports,  despite pressure to curb steel output and relieve a global glut, China said on Tuesday its production actually hit a record high last month as rising prices, and profits, encouraged mills that had been shut or suspended to resume production.

The China Iron & Steel Association (CISA) said March steel production hit 70.65 million tonnes, amounting to 834 million tonnes on an annualized basis. Traders and analysts predicted more increases in April and May.


The data comes as major steel producing countries failed to agree measures to tackle an industry crisis, with differing views over the causes of overcapacity. A meeting of ministers and trade officials from over 30 countries, hosted by Belgium and the OECD on Monday, concluded only that overcapacity had to be dealt with in a swift and structural way.

US Trade representatives were not happy at this slap in the face - in a somewhat ironic turn of fate considering America's role in the global blut of over-capacity in crude oil markets...

Washington pointed the finger at China, saying Beijing needed to cut overcapacity or face possible trade action from other countries.


"Unless China starts to take timely and concrete actions to reduce its excess production and capacity ... the fundamental structural problems in the industry will remain and affected governments - including the United States - will have no alternatives other than trade action to avoid harm to their domestic industries and workers," U.S. Secretary of Commerce Penny Pritzker and U.S. Trade Representative Michael Froman said in a statement.

Asked what steps the Chinese government would take following the unsuccessful talks, Commerce Ministry spokesman Shen Danyang told reporters on Tuesday:

"China has already done more than enough. What more do you want us to do?"


"Steel is the food of industry, the food of economic development. At present, the major problem is that countries that need food have a poor appetite so it looks like there's too much food."

In a monthly report, the CISA said a recent rally in steel prices in China - up 42 percent so far this year - was unsustainable given the rising production, and it warned that increased protectionism in Southeast Asia and Europe would make steel exports more difficult.

"The big rise in steel prices has led to a rapid reopening of capacity that had been shut or suspended ... a large rise in output will not be good for the gap between market demand and supply," the CISA said.

*  *  *

So that's why Steel, Iron Ore, The Baltic Dry are all surging - Yet another (record in fact) credit-fueled malinvestment boom enabling zombie firms to survive amid totally artificial demand for an already over-supplied and over-capacity industry.

“Given time, output will be raised to a level that tips the market back into oversupply,” said Xu Xiangchun, chief analyst at Mysteel Research. “China’s steel industry remains in severe overcapacity, so a glut will return.”

The obvious question - With China's debt/GDP already estimate at 350%, how much longer can China sustain this stunning debt (and by definition, deposit) growth continue? ... and if not much longer then what happens to the mills' order books after July? When inventory levels are sky-high once again, tariffs are even higher, and demand (real demand) remains lower than ever?

Judging by the sudden weakness in China corporate debt, that moment may be getting closer than many think...