With world watching, China steel mills take their chances | Reuters

XIANGFEN COUNTY, China When falling commodity prices and listless demand forced China's Shanxi Zhongsheng Steel Co Ltd to close in October, it was sitting on roughly enough unsold steel to lay high-speed train tracks from San Francisco to the Mexican border.

A sudden turnaround in Chinese steel prices off the back of government economic stimulus efforts changed everything. Belying a global steel slump, the firm came back to life, sold its 100,000 tonnes of inventory and now churns out about 4,000 tonnes of product each day, including rebar and wire rod.

Chinese mills like Shanxi Zhongsheng – dubbed "zombies" because they had idled production when prices slumped in recent years – are coming alive just when other countries are seeking restraint in the Chinese output many blame for a global glut of the metal.

China supplies half the world's steel and despite global oversupply, produced a record amount of the metal in March.

Although China has clearly stated its intention to cut production capacity, the equation in steel towns of Shanxi and elsewhere is not so straight forward, showing how difficult it can be for Beijing to tame an industry that has played an integral part in the country's economic rise.

Many mills like Shanxi Zhongsheng re-open as soon as the price is right, under pressure from local authorities conscious that these firms are often the main employer and tax payer in the community. Many other mills cling to life even in a downturn thanks to the support of local governments terrified at the prospect of mass layoffs and being landed with steel firms' debts.

Restarting steel mills can also have other knock-on effects for local business, adding to demand for coke and in turn demand for coal.

"Everyone's kids will grow up, and in China we like to say they're going to all need to buy a home and a car," said Chen Xuewu, who oversess production at Shanxi Zhongsheng. "That's a guarantee of their basic needs, and it's also a guarantee that there will be steel demand."

The revival of many idled China steel mills is depressing news for rivals from Britain to the United States, which are trying to cope with a surplus of global steel. They already blame cheap and plentiful Chinese exports for killing home-grown steel producers and have threatened trade action.

India's Tata Steel (TISC.NS) said in March it was pulling out of Britain.

In Shanxi alone, at least 23 mills closed or slashed production in the past year or so, figures from online information portal steelcn.cn show. Several are now returning to production.

Even with all the closures, Shanxi produced 38.5 million tonnes of steel last year, more than three times Britain's output - and it was China's fifth-biggest steel producing region. China's total production of 804 million tonnes dwarfed that of any other country.

Indeed, Macquarie Research said in an April report that sentiment among Chinese steel mills is more bullish than it's been in years – a view reflected by Chen.

"The market might fluctuate, but overall I'm optimistic," Chen said. "Cutting capacity is mainly, for instance, for companies with backward production, whether state-run or private. We're not part of that."

On a recent afternoon at Shanxi Zhongsheng, privately owned by Henan Yaxin Steel Industry Co Ltd, local bankers were touring the factory to discuss financing. Chen declined to give details.

LACKING FUNDAMENTALS

A three hour drive north of the Shanxi Zhongsheng plant, near the city of Luliang, the sprawling Wenshui Haiwei Steel factory is silent, save for two men in a yard using a blowtorch to slowly cut apart a giant metal funnel. There aren't even guards at the gates.

Haiwei opened in 1985 and at its peak provided 8,000 jobs. It was forced to shut down for the first time about six months ago after its margins collapsed.

Now though, the Luliang government wants the major tax payer and employer to open again. The mayor and vice mayor visited in March, urging mill managers to bring the plant back online as quickly as possible, state media reported. The company says it's been making preparations for more than a month.

Han Hui, who works in the company's management office in Wenshui, told Reuters that senior managers were in Luliang meeting officials to discuss issues like financing and electricity prices, essential to re-starting. Haiwei is looking for partners, too, he said.

"Steel prices aren't stable. We could re-start now if conditions were right," said Han, reflecting a view among some mill operators that the outlook remains uncertain given China's broader economic slowdown.

The Luliang government office that oversees industrial policy declined to comment.

The Shanxi provincial government this week announced a ban on all new projects that would increase steel capacity as part of plans to improve the environment. Reviving zombies with existing capacity, however, did not seem to be a problem.

The Organisation of Economic Co-operation and Development said more than 30 percent of global steel making capacity was unused in 2015, explaining not only the pressure on global producers but Chinese ones too.

However, in China, the spark that brought many idled steel mills back to life was an 80 percent surge in Shanghai rebar futures prices SRBcv1 between early December and late April as Beijing encouraged debt-fuelled infrastructure projects to lift economic growth from a 25-year low.

Rebar, a steel used on construction, has fallen by 25 percent since then. Laura Zhai, Fitch Ratings' Director for Asia Pacific corporates, said prices would have to fall to levels seen in the fourth quarter of last year before the re-opened mills would start to close again. Fourth-quarter prices ranged between 1,555 yuan and 1,804 yuan per tonne.

As growth in fixed-asset investment - a key gauge of infrastructure spending - remains near 15-year lows, Zhai has doubts about how long the price rally can last.

"For a commodity like steel, you still need the fundamentals to really, really support a price recovery and we just don't see the fundamentals changed that much this year," she said.

For electrician Wang Dehui, working at the newly re-opened Hongda Steel Group plant near Shanxi Zhongsheng means he can work closer to home. But he has no illusions about the future.

"It won't last long," he said, while slurping a bowl of noodles. "They will stay open if the price of steel is good, but when it goes back down they'll close."

(Additional reporting by Shanghai Newsroom; Editing by Neil Fullick)

This story has not been edited by Firstpost staff and is generated by auto-feed.


Published Date: May 11, 2016 05:45 am | Updated Date: May 11, 2016 05:45 am


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