China's Output Floods Global Steel Market

Meng Meng |

Global steel overcapacity has doubled its 2001 levels as slumping demand and new investment fueling output weigh on steelmakers, according to a U.S. industry-backed report released Tuesday.

Despite repeated warnings from industrial insiders and research groups, steel output continued to grow at a rate of 3 percent last year, according to Ernest and Young. The crisis took a toll on U.S. makers, with many blaming China for wrecking havoc.

China’s Steel Fever

As the world’s biggest exporter of steel, China accounts for 46 percent of global output. The country’s oversupply problem is “ beyond imagination,” with more than 300 million tons piled up, Lin Xinchuang, the executive vice-secretary general of the China Iron & Steel Association, told state media. To give that number some scale, China’s oversupply is twice as much as Europe’s entire annual production and has caused the profit margin to plunge to below zero from 98.2 percent in 2011.

Grappling with the smog-choked Capital city, Beijing vowed to slash 80 million tons of steel by 2018 and close down most of the old plants that can’t reach minimum efficiency rates. Beijing’s strong stance, however, did little to dampen the “steel fever.”

In 2013, local Chinese media reported that the mayor of a small southern city kissed the approval letter from Beijing to launch a new steel mill.

The mayor, who took over the small city in 2011, had made a goal of doubling its GDP in five years. The steel project, estimated to worth $70 billion, will add 12,800 jobs and become the bigger growth driver of the local economy.

In China’s Hubei province, the hub of the steel industry, local officials lobbied hard to keep running those inefficient factories that were mandated to be closed by central government.  In Hubei alone, more than 200,000 jobs will evaporate if all state-required cut are carried out, according to analysts’ estimate compiled by the Wall Street Journal. 

The 4 Trillion Incentives

The industry, entrenched into the economy, is losing money at a record pace. Among 36 steel companies listed in China, 11 of them reported loss in 2012.

State and local governments provide huge tax breaks and subsidies for the industry, which many analysts believe is the root of the problems.

In 2008, the central government came up with a $666 billion (4 trillion RMB) stimulus package to boost steel factory expansion, leading to a surge in ore import and capacity.

The market, however, did not keep up with ballooning output. Demand from construction and high-speed train manufacturing shrank, defying expectations that these sectors would drive consumption.  During a period when central government winnowed down the incentives in 2012, 75 percent of steel companies were bankrupted.

Permanent Shutdown

High level of import from Asia has threatened domestic producer who filed 40 complaints with U.S. trade official this year, seeking new import tariffs. A wave of decision are expected this summer.

Analyst Angie Beifus from Ernest Yong said short-term measures such as slashing costs would not stem the surplus in the long run.

“Permanent shutdown of capacity is the only real solution to bring balance to the market, but, in the short term, it is difficult to see this happening given state participation in many countries and additional political incentive to retain employment, regardless of profitability,“ the Ernest Yong report concluded.

Analysts estimated that the industry needed to cut 300 million capacities to return to normal level. But as the same report noted, labor laws, environment cost and permanent loss of plant value added layers of complexity in the process.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
PSPUF Precious Shipping Nvdr n/a n/a n/a 0


Emerging Growth

Sack Lunch Productions Inc

Sack Lunch Productions Inc is an entertainment company. The Company, through its subsidiaries, is engaged in event management, production service, film production and distribution services.

Private Markets


A peer-to-Peer authentic photo marketplace disrupting the $10B commercial photography industry.

Santo Diablo Mezcal

Santo Diablo Mezcal has been created to capitalize on a boom sector of the beverage market currently full of many small unmemorable products by producing one sexy, household, easily recognizable…