Xi’s trade war on himself blows up Chinese steel

Iron ore prices for January 27, 2020:

Via Reuters:

As a result of a sharp rise in production costs and weak steel demand, “steel companies in the north have already suffered large-scale losses”, Sinosteel Futures analysts said in a note.

“Market demand for raw materials is expected to deteriorate further in the near future,” Sinosteel analysts said, also citing the impact of ongoing restrictions in China to curb rising COVID-19 cases and the approaching Lunar New Year holidays.

We shall see. I don’t expect things to slump until H2 as credit tightening takes its toll. If anything, COVID disruptions will delay that.

For now, yes, Xi Jinping’s trade war on Australia himself has cratered steel mill profits:

Normally that would trigger a raw materials destocking episode, and we can expect one through March/April, but China is still so short of ore that it can’t proceed very far, via Goldman:

Xi Jinping’s Australian trade war on himself has built a geopolitical premium into iron ore and driven coking coal wild, feeding back into more iron ore overheating. Both have crushed steel mills profits despite huge demand and rising steel prices.

No wonder it is bleating:

China’s Ministry of Industry and Information Technology has released a series of measures to accelerate the reduction of steel output. Includes:

  • a ban on illegal additions of new capacity
  • bolstering its guidance on capacity swaps
  • push for mergers/restructuring the steel industry to solve long-term issues around competition, unreasonable resource allocation and weak synergies

MIIT says its firmly committed to having steel output wold fall in 2021, will focus on carbon emission targets.

Once again, all the CCP has achieved with its Aussie trade war is to illustrate how vulnerable it is to commodity supply chain squeezes.

All praise the dictator.

David Llewellyn-Smith
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  1. May we discuss what could be China’s most glaring Strategic weakness –

    Food Insecurity .

    I’d love to hear from those better informed than myself .

    • Once they finish hoovering up the world’s oceans (should be quick considering the size of each of their pillaging fleets), then things will be dire……………

    • China is massively self sufficient in food production, could almost support double its current population. What it doesn’t have is protein diversity, which everyone wants when your economic circumstances rise… they are happy enough with pork and chicken, but everyone wants Beef, although NZ Lamb and Lobster is what shows that you have come of age!

  2. Fabian AlderseyMEMBER

    “a ban on illegal additions of new capacity” – this amuses me. There’s probably something lost in translation.

    • Merely a differing of societal views. There’s illegal, and then there is illegal and enforced.
      Chyna seems to love illegal but ignored. See australian RE and the FIRB for an example

  3. “Once again, all the CCP has achieved with its Aussie trade war is to illustrate how vulnerable it is to commodity supply chain squeezes.”

    Perhaps we could have one on how vulnerable Straya is to other commodity supply chain squeezes – specifically oil shortages and/or blockades/embargoes.

    What with Biden scrapping oil leases and the oil majors cutting back exploration in 2020, it seems likely that oil production may indeed have peaked in 2018 which may bode ill for Straya…think mining, commodities, agriculture, imports, transport….bearing in mind that oil demand increases year on year.

    Bloomberg, BP and Oilprice etc present this decline as “societal references”, but in reality the cost of exploration and drilling is becoming uneconomic at today’s prices. (Contrary to popular belief, the world economy runs on energy, in particular, FFs, not finance and money).



  4. This is a good summary, and the reason why the Chinese are dismissive of Biden. He is about to have a tough time…

    China is no longer biding its time and hiding its strength. Those days are over. China’s economic growth in 2020 significantly outpaced the US and all other major economies, which suffered severe recessions. China’s recent adventurism at home and abroad can be explained largely in economic terms. And from their growing belief in the superiority of China’s economic governance model. A new front in the great power competition between the US and China has opened. Beijing isn’t yet ready to challenge the US dollar directly. But it has set its sights on the US bond market, which showed new vulnerability last year. China is taking steps to displace US Treasurys as the world’s most important and reliable asset. China is starting to reduce its direct purchases of Treasurys. The composition of China’s foreign reserves and the amount of its dollar-denominated assets are a state secret. But, Chinese direct holdings of US government debt fell in each of the past five months, and are now at the lowest level in nearly five years. The share of new US debt bought by China is smaller than it’s been in decades. China is also trying to replace the US as the preferred destination for foreign capital to give Chinese securities, especially risk-free debt, a much greater role. And some finance ministries, sovereign-wealth funds and large global asset managers are considering shifting capital in the coming year to China’s higher-yielding sovereign debt. Currently, 10-year US Treasurys yield less than 1% nominally, implying a significant negative real return over the decade. The Federal Reserve’s newfangled policy regime of lower interest rates and higher inflation for longer periods portends continued losses. Investors will increasingly struggle to build portfolios if they are unable to use Treasury bonds to mitigate risk effectively. China’s comparable 10-year bonds yield about 3.25%. China is allowing its currency to strengthen more than 8% against the dollar. The clear and concerted message to global investors: Invest in China and get better, safer returns. The vulnerability of the US bond market became clearer when Covid fears struck last year. The Treasury market’s prices fell unexpectedly, even as equity prices plummeted. US bond liquidity evaporated, and Treasurys failed to serve as an effective market hedge. Market panic ensued. The Fed entered the market in unprecedented scale and scope, purchasing about $1 trillion in government debt in about three weeks. A decade ago US bonds served as the ultimate safe haven. Many of China’s leaders no longer hold the US economy in the same regard. They believe America’s growing addiction to negative real interest rates, its unsustainable fiscal path, and the Fed’s debt monetization indicate a country – and a system – in decline. America’s economic future, however, depends less on the top-down, macroeconomic decisions of mandarins in Washington than China might appreciate. US prospects rest more on the resilience and dynamism of the micro-foundations of our economy – the culture of hard work, risk-taking, free allocation of capital and labor, and respect for the rule of law in a market system. China is moving with dispatch to establish itself as the preferred destination for low-risk capital returns. If successful, this would be a critical step in its effort to establish an alternative financial and economic global ecosystem. China could then emerge as a more viable and serious rival for hegemony. More forward-looking US economic policy is required to retain the privilege of US Treasurys as the world’s safe-haven asset, not least to strengthen America’s position in its growing rivalry with China. Kevin Warsh (a former member of the Federal Reserve Board), The Wall Street Journal