China Metals Report Q2 2010

Over-capacity will be a pressing problem for Chinese steel and aluminium producers as they face an era of lower growth rates, according to this latest BMI China Metals Report. In 2009, Chinese crude steel output grew 13.8% year-on-year (y-o-y) to 567.8mn tonnes. In 11M09, China’s finished steel production was up 17.4% y-o-y to 628.33mn tonnes. Finished steel exports fell by 62.1% y-o-y to 21.26mn tonnes with finished steel imports up by 11.4% to 16.15mn tonnes. In contrast to steel, aluminium output declined in 2009, although not as steeply as BMI had anticipated. Primary aluminium output fell 1.1% y-o-y to 12.96mn tonnes. In Q409, output was 3.95mn tonnes, up 14.2% quarter-on-quarter (q-o-q). By December 2009, average daily output was 42,900 tonnes compared with the March low-point of 28,500 tonnes.
There is a consensus that China’s steel industry is headed for a period of lower growth rates as it adjusts to the imbalance between production and demand, oversupply and bounded export, and government policies aimed at economic structural adjustment. With 700mn tonnes per annum (tpa) of capacity, China had an estimated surplus capacity of 130mn tpa in 2009 when the industry was operating at just over 80% capacity. The utilisation rate of hot-rolled coil was just 60%. China is seeking to curb excessive capacities. In 2009, the country eliminated 21.2mn tpa of outdated iron smelting capacity and 16.9mn tpa of steel smelting capacity, of which only a fraction was needed to bring supply in line with demand. In late 2009, the Ministry of Industry and Information Technology (MIIT) said it would not approve new steel projects over the next three years. BMI is doubtful that this is enforceable, with provincial authorities keen to keep up the rate of investment in metallurgy. Projects currently underway are likely to be completed, even if they are delayed.
BMI forecasts 5.9% crude output growth as we expect liquidity curbs controlling inflation to have an adverse impact on domestic demand, though the market is robust enough to continue growing. We also believe that by the time monetary tightening begins to take effect, steel stockpiles will have been run down enough to prevent the price volatility seen in 2009.
BMI’s forecast model states that Chinese primary aluminium output will reach 14.86mn tonnes in 2010, an increase of 14.6% y-o-y. This is far lower than Chinese research group Antaike’s forecast of 24.7% growth to 17mn tonnes, in large part due to our more pessimistic demand scenario in a market that will be undermined by high inventories, rising cost pressures and over-capacity. Antaike outlook would see China becoming a net exporter of the metal in 2010, a scenario we believe is unlikely given the poor global market environment. While the annual aluminium output growth range of 15-30% is unlikely over the next five years, we nevertheless expect production to reach 22.2mn tonnes by 2014, an increase of over 70% compared with 2009.