Mr Matt Jamieson spoke with Su Aik Lim, Fitch's Asia Pacific steel sector analyst based in Hong Kong, about China's steel industry and specifically the recent anomaly of record production levels following record losses.
Mr Jamieson is Head of APAC Research in Fitch's Corporate Ratings Group.
Su Aik explains that a combination of seasonal factors and slower economic growth negatively affected the steel makers' profitability in Q111, and he expects China's steel industry production growth to decelerate to below 5% in 2012 from 7% in 2011.
Matt: According to the latest release by China's National Bureau of Statistics, Chinese crude steel production again crossed the 60 million tonne level to 60.6 million tonne in April after March's monthly record high of 61.6 million tonne. However, the China Iron and Steel Association noted that the steel industry reported record losses in Q112 due to low steel prices and weak steel demand. Do the high output levels reported in April have anything to do with central government control over the industry, particularly given that it owns nine of the top 10 largest steel groups which produce close to 50% of China's total crude steel production?
Su Aik: On the contrary, the central government of China is cognizant of the Chinese steel industry's over capacity problem and has prohibited new capacity expansion. However, development of the steel sector is strongly supported by the local city or county governments since the sector is an important employer and tax revenue contributor.
Furthermore, while the central government sets the policy regulating and supporting the steel industry, it does not dictate the operation of the steel companies. For example, it is not uncommon to see state-owned steel companies producing the same products and competing intensely with each other for market share. Besides, the central government only directly owns three of these steel groups, which total 20% of China's crude steel production.
Matt: How then can we explain why the Chinese steel manufacturers were willing to continue with high production levels in April after reporting losses during Q1?
Source: Reuters