China’s Steel Industry Sounds The Alarm Over Crisis Conditions

Bundles of steel tubes at a metal stock yard in Shanghai, China.

(Bloomberg) -- China's steel mills are sounding the alarm over crisis conditions in the industry as margins plunge due to weak demand.

The starkest warning yet has come from Hunan Valin Iron & Steel Group, which met this week to discuss the rapid downturn in the sector and the measures it needs to take to ensure the company's survival, including halting unprofitable production. Citing industry experts, the mill based in southern China said it expects the crisis to persist for five years.

Other mills in both the northwest and southwest of the country have pledged to reduce output as they wait on infrastructure spending to revive steel demand. Stockpiles have swollen way beyond seasonal norms after China's crackdown on its property sector and its Covid Zero policy curbed construction activity. The steel industry's purchasing managers' index for June recorded its worst reading in a decade last week.

Although stockpiles were finally being drawn down at the end of the month as China rolled back some of its toughest virus restrictions, they're still 23% higher than a year ago, according to the latest survey from the China Iron & Steel Association. President Xi Jinping has called for an all-out push on infrastructure to rescue the economy, but it's unlikely that will fully make up for demand lost from the real-estate sector.

Cutting output, at least from last year's levels, is likely to suit both industry and government, as reduced supply will support prices as well as aiding Beijing's mission to cap carbon emissions from the highly pollutive sector.

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