Notwithstanding today’s (perfectly engineered soft-landing) Chinese GDP of 7.6% for the year-on-year June quarter, things are not looking too bright for the Middle Kingdom in the steel space. This, in turn, should be causing considerable consternation among the exporters of coking coal and iron ore.

The Epoch Times reports that China’s steel production capacity exceeds 900 million tonnes per annum but that demand was only 700mtpa in 2011 and continues to decline. Many Chinese steel mills are losing money for the first time in over a decade, as a result of high fuel prices and, particularly, reduced demand from the property sector.

Weak demand is causing steel companies to curtail production by shutting down blast furnaces. Companies are also reducing spot purchases of iron ore and reducing inventories. Iron ore imports in June were around 58 million tonnes, down about 10% on May.

Even so, stockpiles of unloved steel are growing like topsy, as are stockpiles of iron ore. Country-wide, iron ore stockpiles are thought to amount to around 100 million tonnes and growing.

In 2008 China implemented a huge spending program to boost growth during the GFC. It worked, if you need lots of empty apartment buildings, highways to nowhere etc. A second stimulus is on the cards, or maybe already underway, as lowering interest rates has done little. But any stimulus is unlikely to provide much help to the steelmakers.

The steelmakers are seeking to diversify. One of the best stories is that of Wuhan Iron and Steel, which, inter alia, is looking to grow pigs. I guess there is some symmetry with the production of pig iron, but that is really a stretch.

The conventional view of iron ore producers, and apparently our Australian government, seems to be that lower returns, resulting from a lower iron ore price that is a result of lower demand, can be made up for by increased production. Qué?

13 July 2012 Macro