By launching a raft of stimulus measures last month, the Chinese government is making a huge bet that it can shift the country’s economy out of its current malaise. Nowhere is there more at stake than in the struggling Chinese steel industry.
The ongoing decline of China’s real estate sector, the source of over a third of Chinese steel demand, has hit firms hard. The industry has been loss-making for 14 straight months, with combined losses through August this year reaching nearly 17 billion renminbi ($2.4 billion), according to data from the National Bureau of Statistics.
The downturn is evident at companies like Dongling Group, China’s largest supplier and distributor of steel for construction. Once the pride of Baoji, the city in central China where the company is based, Dongling announced it had fallen into bankruptcy in July.
It is not alone: some 46 Chinese companies in the broad steel sector — including producers, trading companies and others — declared bankruptcy in September alone, according to the government’s National Enterprise Bankruptcy Information Disclosure Platform.
The question now facing policy makers is whether last month’s broad stimulus measures can turn around steel companies’ fortunes: or whether a more radical reset is necessary for an industry which directly employs around 1.8 million people, with millions more indirectly dependent.
The answer will have global implications: as demand has diminished at home, Chinese steelmakers are seeking to sell more abroad. Chinese steel exports reached 70.6 million tonnes over the first eight months of this year, according to data provider MySteel, up by over a fifth compared with the same period a year ago — a rise that has put pressure on steel prices globally.
Some experts believe China’s steel industry — which last year accounted for over half of global output, producing over seven times as much as the next biggest producer, India, according to World Steel Association data — has already reached a point of no return.
“It’s not like 2008, when you can just put money into the economy and everything’s okay for a bit. There’s been a lot of stimulus, but it won’t change the restructuring that’s necessary,” says Tomas Gutierrez, head of data at London-based consultancy Kallanish Commodities.
“Now there’s an acceptance across all state-owned steelmakers that there will be survivors and companies that do not survive,” he adds. “There will be a lot of capacity that has to be cut out somehow.”
As Gutierrez suggests, this isn’t the Chinese steel industry’s first downturn. It was hit hard following the 2008-2009 global financial crisis and again in 2015-2016, when China’s stock market plummeted and growth stalled. On those occasions, the government propped up the industry largely through massive stimulus efforts.
This time round, industry experts say a lasting recovery is unlikely because Beijing is trying to steer the Chinese economy permanently away from over investment in areas like construction.
“I wouldn’t even call it a crisis, I’d call it a restructuring of the economy,” Gutierrez says. “In 2008 they wanted to solve the situation by increasing investment, which was good for steel consumption. The way they want to fix the economy now will be harder for steel, because it will mean less is consumed and produced in China.”
Stopping and restarting blast furnaces is costly, so many plants continue production even when they are losing money. Many still believe that if they can weather this year, as they have in the past, they might qualify for government subsidies…
Neo He, a long-time consultant in the steel industry
The pessimism is clear at Baowu Steel Group, the world’s largest steel maker. In August this year, the group’s chairman warned that the current industry crisis could be far worse than the previous two downturns this century.
“In the past, whenever the industry faced a downturn, many believed it would be a temporary setback,” said Jiayu Li, a senior associate at the public-policy advisory firm Global Counsel. “But this time, nearly everyone understands that demand has truly hit its limit and is unlikely to recover.”
Even companies that haven’t gone bankrupt are struggling. Mr. Liang, a salesman at a building materials company in eastern province Shandong was contacted via Taobao, and who spoke to The Wire on the condition that his full name was not disclosed, said orders for its steel products used in railway and bridge construction have halved this year compared to last.
“National and local finances are tight, and many construction projects have been halted,” Mr. Liang said. “There are now more competitors and fewer customers.”
Beijing is making some effort to deal with the steel industry’s systemic overcapacity. In August, the Ministry of Industry and Information Technology halted approvals for new steel plants, with the government warning that failing to comply with this directive would be seen as an “illegal increase in steel production.”
The government’s broader economic stimulus package late last month, which included mortgage interest rate cuts, has also offered the industry some respite, with construction steel prices rising approximately 10 percent within a week after the announcement.
Such measures may encourage steelmakers to keep producing for now, despite warnings about the sector’s long-term future. China’s overall steel production is down this year, but only by 3.3 percent over the first eight months of the year, according to MySteel.
“Stopping and restarting blast furnaces is costly, so many plants continue production even when they are losing money.” says Neo He, a long-time consultant in the steel industry. “Many still believe that if they can weather this year, as they have in the past, they might qualify for government subsidies or witness a rebound in the real estate market.”
Longer term answers are tricky to find. The Chinese steel sector has already undergone substantial consolidation, including the mega-merger that created Baowu in 2016. Allowing more steel companies to fail is politically sensitive, however, given the likely effect on jobs and local government finances.
Kallanish’s Gutierrez says the Chinese authorities could try administrative measures, such as forcing companies to cut old capacity before adding any new mills. But that, he says, could take time and prove difficult to implement.
“The danger is that if the government doesn’t succeed in reducing capacity quickly enough, then the market comes in, and that means profits have to be squeezed until enough companies go bankrupt — that’s partly what we’re seeing now,” he says.
The lack of easy domestic solutions has led Chinese steelmakers to try to increase their exports. On current trends, steel exports could top 100 million tonnes this year, the highest since 2016.
This surge has led some countries, like Chile, to close their largest steel mills due to a flood of cheap Chinese imports. One big importer, Vietnam, imposed anti-dumping measures in June, resulting in a 21 percent drop in Chinese steel imports the next month, based on data from Steel Orbis, a market data provider. Indonesia, China’s second-largest steel importer, is mulling tariffs of up to 200 percent on Chinese goods, including steel.
“Chinese steel firms that are near bankruptcy are simply dumping their inventory abroad because there’s nothing else to do with it,” says Benn Steil, director of international economics at the Council on Foreign Relations. “That’s the only way to raise cash, to try to hang on until there’s some sort of global recovery in the market.”
Over the past 30 years, Mr. Liang’s company has concentrated on its domestic business. However, next year, it plans to shift its focus overseas. He has noted potential policy support for exporting steel to countries that are part of the Belt and Road Initiative.
“Doing business abroad might be easier due to our price advantage,” Mr. Liang said. “But I don’t think we’ll ever return to pre-pandemic levels [of orders].”
Yi Liu is a New York-based staff writer at The Wire. She previously worked at The New York Times and Beijing News. Her work has also appeared in China Project, ChinaFile and Initium Media.