China cuts steel output on weak demand Thinning order books, high prices cause inventory pile-up

Print this page Posted on : 10-30-2008 by recycleinme.com

Mills are carrying a large inventory of raw material, mainly iron ore, purchased at high prices for the Olympics period, to insure against any supply disruption.

Mumbai, Oct. 29

Stung by the threat of recessionary conditions in the Western world and slowdown in industrial activity resulting in lack of demand within the country, China has begun to cut metals output. Infrastructure activity in the Asian major is clearly on the downswing. Steel is the first casualty.Production of crude steel continued its sharp decline, with a strong 9.1 per cent year-on-year fall in September.

The sharp steel cuts reduced the annualised rate of Chinese steel production from a peak of 571 mtpa (million tonnes per annum) in June to only 482 mtpa in September, representing a fall of 89 mtpa. It now looks likely that Chinese crude steel production will struggle to reach 520 mtpa, said Macquarie Research

Commodities in a report, adding that a major reason for the collapse in Chinese steel production was a reported collapse in export orders due to credit crunch.

Demand side factor

With export having constituted 10-15 per cent of production recent months, this is a major hole in the order books of the Chinese mills, the report pointed out. It is, of course, not the first time that Chinese steel mills are cutting output. It happened in 2006 and 2007 too; but that time it was raw material shortage and a sharp spurt in prices of spot iron ore forced mills to rethink their options. This time, the problem is with the demand side. The order books are thin and raw material prices are plunging. Mills are carrying a large inventory of raw material, mainly iron ore, purchased at high prices for the Olympics period, to insure against any supply disruption. The sharp drop in steel prices caused by the global economic slowdown has caught most mills by surprise.

To deal with the price correction and diminishing demand they reduced their production, which meant it took longer for their expensive inventories to be consumed, remarked Macquarie Research.

Reflecting global market conditions and weak sentiment in the metals market, the Indian 63.5 per cent iron ore fines fell to $76 a tonne c.i.f (cost, insurance, freight) over the past week, lower than Australian and Brazilian products. The 63 per cent iron product is now selling at around $62/tonne c.i.f, according to reports. Freight costs have also approached a five-year low. Shipping costs for iron ore from Brazil to China dipped to $11.50-12.50/tonne, while freight cost between Australia and China also touched a five-year low at $ 5.50/tonne.

Source : Business Line