Chinese Steel Industry Cautions Against Over-Production Amidst Economic Slowdown
Late last month, the official journal of China's metals industry warned that the 10% surge in iron ore prices, which exceeded $100/ton, was "irrational" and lacked "fundamental support." Presently, prices are hovering around the $90/ton mark as China's leading steel industry group advises mills to exercise caution when increasing production.
Rich Privorotsky of Goldman Sachs informed clients that "Iron ore is dropping to 90, China will continue to struggle, and commodities as a whole, I think, are reflecting the downgrade to growth expectations in the geography."
The China Iron & Steel Association issued a memo to industry insiders this week, stating, "There will be a certain degree of recovery in steel demand through September and October, which is favorable for the steel market." However, the association also warned against the impulse to restart production, suggesting that excess steelmaking material output could result in any improvements being short-lived.
China's steel industry is currently under strain due to a significant downturn in the property market and a sluggish economic recovery. Last month, Baowu Steel Group Chairman Hu Wangming described the economic conditions in the world's second-largest economy as a "harsh winter."
Baowu Steel, the world's largest steel producer, cautioned that the steel industry's downturn could be "longer, colder, and more difficult to endure than expected," potentially mirroring the severe downturns of 2008 and 2015.
This serves as a significant warning to macro observers that a recovery in China is not imminent. In fact, Beijing may not implement monetary and fiscal measures until after the US presidential elections.
Goldman analysts Aurelia Waltham and Daan Struyven recently stated that iron ore's "fundamental outlook remains bleak." They highlighted that only 1% of Chinese steel mills are currently profitable, according to a Mysteel survey.
A separate Goldman note published earlier this week warned that the downturn in the Chinese steel industry has created a "challenging environment for iron ore."
The broader commodities complex is also affected by fears of a slowdown in China, with Brent crude sliding to $73/bbl, and copper fading from record highs. Goldman Sachs has reduced its 2025 price forecast for copper by nearly $5,000.
Zhao Liang, head of research at GF Futures Co, summarized the situation in an interview with Bloomberg: "The fundamental picture supports the slide in. Overall, it's due to weak steel demand—people are pessimistic."
Bottom Line
The current situation in China's steel industry serves as a stark reminder of the challenges facing the global economy. The cautious approach advised by the China Iron & Steel Association underscores the need for careful management in times of economic uncertainty. What are your thoughts on this situation? Do you think the steel industry can weather this storm? Share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
Chinese Steel Industry Cautions Against Over-Production Amidst Economic Slowdown
Late last month, the official journal of China's metals industry warned that the 10% surge in iron ore prices, which exceeded $100/ton, was "irrational" and lacked "fundamental support." Presently, prices are hovering around the $90/ton mark as China's leading steel industry group advises mills to exercise caution when increasing production.
Rich Privorotsky of Goldman Sachs informed clients that "Iron ore is dropping to 90, China will continue to struggle, and commodities as a whole, I think, are reflecting the downgrade to growth expectations in the geography."
The China Iron & Steel Association issued a memo to industry insiders this week, stating, "There will be a certain degree of recovery in steel demand through September and October, which is favorable for the steel market." However, the association also warned against the impulse to restart production, suggesting that excess steelmaking material output could result in any improvements being short-lived.
China's steel industry is currently under strain due to a significant downturn in the property market and a sluggish economic recovery. Last month, Baowu Steel Group Chairman Hu Wangming described the economic conditions in the world's second-largest economy as a "harsh winter."
Baowu Steel, the world's largest steel producer, cautioned that the steel industry's downturn could be "longer, colder, and more difficult to endure than expected," potentially mirroring the severe downturns of 2008 and 2015.
This serves as a significant warning to macro observers that a recovery in China is not imminent. In fact, Beijing may not implement monetary and fiscal measures until after the US presidential elections.
Goldman analysts Aurelia Waltham and Daan Struyven recently stated that iron ore's "fundamental outlook remains bleak." They highlighted that only 1% of Chinese steel mills are currently profitable, according to a Mysteel survey.
A separate Goldman note published earlier this week warned that the downturn in the Chinese steel industry has created a "challenging environment for iron ore."
The broader commodities complex is also affected by fears of a slowdown in China, with Brent crude sliding to $73/bbl, and copper fading from record highs. Goldman Sachs has reduced its 2025 price forecast for copper by nearly $5,000.
Zhao Liang, head of research at GF Futures Co, summarized the situation in an interview with Bloomberg: "The fundamental picture supports the slide in. Overall, it's due to weak steel demand—people are pessimistic."
Bottom Line
The current situation in China's steel industry serves as a stark reminder of the challenges facing the global economy. The cautious approach advised by the China Iron & Steel Association underscores the need for careful management in times of economic uncertainty. What are your thoughts on this situation? Do you think the steel industry can weather this storm? Share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
