Volatility Bites Back.
What China giveth, China taketh away. Steel prices are down some 5% to 10% globally due not so much to a slowing of economic growth in China, but due to worries of slowing.
The next big question the global steel industry will be addressing will clearly beproduction cuts; in the first six months of the post crisis world in 2008, the global steel industry cut production by 30%, an unprecedented response.
The argument for cuts in China in particular is compelling given China's higher cash cost position and the coming cost increases locked in for the third quarter.
In the past week there have been dozens of reports from Chinese"establishment press" calling for production cuts, culminating in a high profile
interview with the chairman of
earlier this week calling for production cuts by "smaller mills" -- which we view as a clear challenge to Beijing and CISA to allow market forces to drive production cuts by the higher cost provincial mills and avoid the past export subsidies that become the industry's lifeline during prior periods of economic slowing.
Production Cuts in the West.
The profound production cuts early in this recession were in our view not so much a result of so-called "discipline" but reflected the new economics where cash costs dominate steel production as compared to the high fixed cost environment of a decade ago where producers maximized profits by running flat out.
With steel prices peaking only weeks ago, there are already numerous press reports of idling. In the U.S. we've already seen Severstal's giant Sparrows Point facility scheduled for market-related closure; ArcelorMittal has already talked about idling three blast furnaces in Europe.
Outlook - Chinese Production Cuts Will Accelerate Quickly.
We expect to see meaningful production cuts coming out of China in coming weeks. In the prior decline Chinese production had declined in the months ahead of the crisis due to the Olympics; so China actually did very little cutting in late 2008 and in fact was raising production from December 2008 onwards.
This time the slowing is coming from China, so there will be no choice but to cutproduction or ramp up exports to the West - and there are very few places in the world today that will be tolerant of a temporary surge in high cost steel from China.
So we expect to see China bring the globe back to equilibrium in the next quarter through a combination of production cuts and continued strong economic growth.
Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.