Does US Steel Have Room to Run Even Higher? PART 4 OF 12
China’s capacity curtailments
As we’ve already seen in this series, steel prices have been strong this year. The strength has been driven by positive supply and demand dynamics. On the demand side, demand has been better than expected in China. Also, China’s supply-side reforms are supporting steel prices (X) (AKS) (NUE).
China’s plan to curtail its excess steel and aluminum capacity has led to a spike in prices. These curtailments could help address the concerns of China’s trading partners that blame the country’s massive overcapacity for the global steel industry’s woes. Chinese authorities are also clamping down on polluting industrial units in a bid to control the country’s pollution levels. However, many observers have doubts about China’s “commitments” to cut its steel overcapacity. ArcelorMittal (MT) touched upon the issue of Chinese capacity cuts during its 2Q17 earnings call.
According to Lakshmi Mittal, ArcelorMittal’s CEO (chief executive officer), China had 300.0 million metric tons of steel overcapacity, of which the country has closed 105.0 million metric tons. He added, “We think that they should shut another 200 million tons that achieves a high level of capacity utilization, so there is still some way to go in achieving those numbers.” However, China plans to curtail another 45.0 million metric tons of steel overcapacity.
It’s worth noting that despite these capacity cuts, Chinese steel production is running at record levels. While a better domestic demand environment certainly is leading to a spike in Chinese steel production, higher margins are also boosting Chinese steel production (CLF). We’ll look at this in detail in the next part.