Steel industry doubts China will enforce output cut plans
SINGAPORE: China says it wants to cut crude steel output this year but traders and steelmakers are betting Beijing won't follow through as industry profitability improves and trade tensions weigh on the economy.
The world's largest steel producer in March unveiled plans to cut output and restructure its giant steel sector to address overcapacity which has long plagued the industry and is spilling over into export markets and angering trade partners.
But at the flagship Singapore International Ferrous Week conference, conversations with fifteen traders, steelmakers, analysts and hedge funds all had the same message: the cuts are unlikely to be enforced.
Profitability is improving across the industry driven by unexpectedly strong demand, undercutting some of the logic of reining in output in the first place, they said. In the year to April industry profits hit 16.9 billion yuan (US$2.35 billion), versus a loss of 22.2 billion yuan in the same period last year.
Participants bet the turnaround will make Beijing less likely to crack down, especially as the trade war with the United States makes policymakers sensitive about maintaining economic growth.
There's even less incentive for the local governments where many of these steel mills are an important contributor to the growth targets officials are assessed against.
"When mills could make some money after grappling with survival in the past two years, no one has the motivation to slash output," said a manager from a medium-scale Chinese steelmaker on condition of anonymity.
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