Confessions of a Chinese steel mill

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Some snapshots of interviews conducted by Morgan Stanley in China recently:

Procurement manager of a larger steel mill

Demand
Seasonality will remain a big issue in the steel market. This year, June-July will be a tough period for the industry. There is the risk of a reduction in financing with banks pulling loans from smaller mills as half-year accounts have to be drawn up.

Infrastructure stimulus cannot offset the decline in the property market due to the difference in base. Property still accounts for 35-40% of steel demand versus 17-20% for infrastructure. Railway as a percentage of total infrastructure is quite small at less than 20%. More than 40% of infrastructure is highway.

OBOR could stimulate exports

However, it all depends on how many actual projects can be run. Now companies are mostly focused on export of products/materials rather than involvement in and management of projects on the ground. There is clear central government financing for good projects, but these also require the co-operation and agreement of the local government and population.

Large international steel trader

Conclusion
Peak steel demand is likely past. Direct steel exports will remain high but probably peak at current levels. The Chinese steel industry will most likely resemble the European one for some time; better to lose money but be in the market rather than close.

Exports
In the last four months, they have stabilised at around 8.5mn metric tons per month. Trade cases that are being launched worldwide are putting a brake on the growth rates.

Nothing there to alter the MB outlook.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.