Top steelmaker Baowu warns Chinese producers face severe crisis

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The world’s largest steelmaker has warned that Chinese producers are in a fight to survive a severe and more protracted “winter” than previous downturns, as the property market in Asia’s largest economy suffers a crippling multiyear slump.

The steel industry “winter”, or crisis, was likely to be “longer, colder and more difficult than we expected”, said Hu Wangming, chair of China Baowu Steel Group, on Wednesday, according to a company statement detailing the firm’s recent meeting of half-year results.

The global steel sector faced devastating slumps in 2008 and 2015 that led to consolidation of China’s fragmented producers. Baowu itself was formed out of a merger between Baoshan Iron and Steel and Wuhan Iron and Steel in 2016.

However, the warning by state-owned Baowu suggests that the latest crisis will be even more severe, after the sector has been ravaged by weak real estate demand and industrial production. These in turn have created a glut of steel that has driven down prices, leading to losses at mills.

“The entire Chinese steel industry is positioning for a consolidation,” said Colin Hamilton, commodities analyst at BMO.

Chinese steelmakers have been turning to foreign markets to find a home for their products, exporting the most in the first half of 2024 in eight years, but face increasing barriers as other nations put up tariffs to protect their own industries.

New construction starts — the steel-intensive part of building property — declined about 24 per cent in China in the first half of 2024, following contractions of 21 per cent and 39 per cent in 2023 and 2022, respectively, according to Commonwealth Bank.

During previous market downturns, policymakers resolved the crisis through stimulus but attempts to breathe life into China’s property market this time around have fallen short.

Iron ore continued its weakness on Wednesday, dropping deeper below the key $100-per-tonne mark.

Chinese steel mills are under pressure to make further production cuts to shore up prices and avoid large losses.

Hou Angui, general manager and deputy party secretary at Baowu, who is part of key decision-making at the state-owned firm, said “the current situation in the steel industry is more severe than the downturns of 2008 and 2015”, at a recent half-year review meeting.

Hou had urged financial departments at all levels of Baowu Steel — which produces about 7 per cent of the world’s steel — to “pay closer attention to the security of cash flows and develop long-term cash balance plans”.

The company should also promote extreme inventory management and shift away from the traditional mindset of maintaining a certain level of safe stock, Hu added.

Faltering demand has been depressing production, according to official data, although analysts suggest that output needed to be cut further to balance the market. China’s pig iron and crude steel output fell by 3.6 per cent and 1.1 per cent year on year, respectively, to 435.62mn tonnes and 530.57mn tonnes in the first half of 2024, figures from the National Bureau of Statistics of China showed.