China Steel Output Hits All Time High, Setting Stage For Escalating Trade War

While the long-term consequences of Trump's first trade war salvo launched today will become obvious only in hindsight, it may have come at an opportune moment: just as China prepares to flood the world with record amounts of steel. Overnight, the National Statistics Bureau reported that even as Beijing intensified its war on smog, local steel output "paradoxically" hit a new monthly record in July, some 74.02 million tonnes, up 10% Y/Y (or 50% more than China's GDP) and higher than the previous record of 73.23 million tonnes set in June.

For the first 7 months of the year, total production rose to a record 491.55 million tonnes, up 5.1% over the prior year period. 

As Xu Bo, steel analyst at Haitong Futures observes, while Chinese steel output normally slows during the summer months, when building construction eases off due to the heat, this year the pattern has not held "due to Beijing's crackdown on low-end rebar and capacity cutbacks in the steel sector" which has prompted mills, spurred by rallying profits, to work with full capacity. "Steady demands from infrastructure also gave support to steel prices, which encourages mills to churn out more products," Xu said cited by Reuters.

The Chinese commodity sector, boosted by a new wave of construction this time in Tier 2-4 cities, has been on fire in 2017 with the most-traded rebar futures contract gaining nearly 50% this year, peaking at 4,016 yuan ($603.15) a tonne last week before retreating modestly around 5%.

However, the biggest impact will be on trade, and China's favorite pastime: dumping excess production in international markets. As Reuters correctly points out, "the data will likely fuel worries in the United States and Europe that China's efforts to cut excess capacity in bloated heavy industry are not leading to a drop in supplies, which foreign rivals say are flooding international markets." In the past, this has resulted in sharp tariffs imposed by the US on Chinese exporters, and this time won't be any different, only it will take place in the context of a belligerent trade standoff.

Meanwhile, China has been pushing to clean up its inefficient manufacturing sectors for years as part of its war on smog and supply-side reform.

This year it has sought to curb output of low-grade steel like rebar used in construction, leading to a surge in prices as investors bet on tight supplies.

Of course, just like with US shale producers, the surging prices promptly sparked the return of domestic producers, and allowed steel mills to expand plants if they comply with stricter environmental standards, which has offset much of the capacity reductions. And now, with Chinese steel inventories back to an all time high "square one" thanks to a glut of steel and other commodities, it will either have to build more ghost cities or it will dump the excess production in international markets, unleashing further trade wars around the globe.

Comments

LetThemEatRand God Emperor Mon, 08/14/2017 - 21:14 Permalink

That, and this:“I see in the fight club the strongest and smartest men who've ever lived. I see all this potential and I see squandering. God damn it, an entire generation pumping gas, waiting tables, slaves with white collars, advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don't need. We're the middle children of the history man, no purpose or place, we have no Great war, no Great depression, our great war is a spiritual war, our great depression is our lives, we've been all raised by television to believe that one day we'd all be millionaires and movie gods and rock stars, but we won't and we're slowly learning that fact. and we're very very pissed off.” ? Chuck Palahniuk, Fight Club

In reply to by God Emperor

HalinCA (not verified) HedgeJunkie Wed, 08/16/2017 - 13:55 Permalink

Put tariffs on it so US steel is 20% less expensive.Force the Chinese to retire the dirtiest 30% of their plant.  IF the MOU running the EU are serious about 'global warming' this would be a great way to force China to clean up their air and their country.Europe did it with coal and iron after WWII for other reasons ... time for the CHICOMS to join the club.

In reply to by HedgeJunkie

truthalwayswinsout Mon, 08/14/2017 - 21:00 Permalink

There are 30,000 BMB's ready to explode in China. Those are Bernie Madoff Bombs. Enron and Bernie Madoff were pretty big events but they really had no impact on the economy in the U.S. But think of what would happen if 30,000 of them blew up all at once.That is China.The Chinese are inverterate gamblers and liars.  The Japanese are the same as well and their economy has been in a depression for the past 20 plus years from the lies they told but they are little children compared to the magnitude of the Chinese lies and frauds.The perpetrators are already fleeing the scene as fast as they can get any amount of money out of China.Everyone is worried about the amount of treasuries that China holds but in the last 6 months we got back close to $500 billion of them with the crooks taking their money out and buying real estate or buying companies in the US. 

Antifaschistische truthalwayswinsout Mon, 08/14/2017 - 23:18 Permalink

UHHHHHH, okay...I appreciated the bmb boms ready to explode analogy.But Japan and China are not the same....I'd recommend you take a trip through both countries.  They are NOT the same.  Japan is truly dedicated to quality and pride in craftsmanship at all levels.   China is dedicated to making something cheaper SEEM like it is as good as something else when they know it isn't.When you walk the street of China WITH your Chinese friends they are always telling you "don't buy from him...he is a liar, don't buy from them...they are no good, etc."   This does not happen in Japan.   The Japanese are proud people...and they deserve to be proud of their accomplishments.  At a craftsmans level...they focus on the long term.  The Chinese focus on the fastest way to make a quick dollar and they sacrifice quality and long term capital investment (at every level) necessary to achieve multi-generational success.I mentioned in a post yesterday...one person I was told of in China who refused to change the oil in their car because it was a waste of money.   Short term....long term....  

In reply to by truthalwayswinsout

lester1 Mon, 08/14/2017 - 21:02 Permalink

We have been in a trade war for the past 30 years and have lost millions of manufacturing jobs and trillions in wealth. There is nothing left for China to take from us.  So any new  negotiations would be in US favor. MAGA

Stormtrooper lester1 Mon, 08/14/2017 - 21:15 Permalink

The trade war has been due to the Federal Reserve printing unlimited dollars since August 15, 1971 (elimination of the gold standard and no limits on funny money creation) and creating a perception of higher incomes and standards of living in the US while countries that cannot print dollars arbitraged their lower cost labor, relative to inflated US labor, into manufacturing powerhouses (Japan, China and then other Asian countries).  It will end with a collapse of the dollar.

In reply to by lester1

deoldefarte Tue, 08/15/2017 - 06:13 Permalink

Excess steel???No problemo....Just invent a new product...portable fallout shelters.Manufacture locally, and ship over here fully assembled.So instead of the old mantra: " duck and cover."We may have: "DIG"- the excavation; "PLACE"- the shelter; "COVER"- with excavated dirt.Should be an instant hit..excess steel problem solved..LOL.

AnarchistRex Tue, 08/15/2017 - 09:48 Permalink

... "it will either have to build more ghost cities or it will dump the excess production in international markets" ...

OR it will start building tanks,fighter aircraft, submarines, and ships. With the global economy tanking ... what to do with all the unemployed people who might start rebelling?

Why do governments ALWAYS sabre rattle and war when the economy is bad?

aldol11 (not verified) Tue, 08/15/2017 - 09:56 Permalink

what a crock of shut. author has not been to china lately. economic growth is spectacular, i am surprised that steel is up only 5%