Top steel industry seen producing most ever on price surge

[SHANGHAI] China, maker of half the world's steel, probably boosted production to a record in April as mills fired up furnaces and domestic prices surged to 19-month highs, according to Sanford C Bernstein & Co.

Average daily output may have eclipsed the previous high of about 2.31 million metric tons in June 2014, said Paul Gait, a senior analyst in London. Producers ramped up supply as local demand rebounded and prices jumped as much as 69 per cent from their November low, generating the best margins since 2009. About 5 per cent of total capacity, or 60 million tons, was shut last year as the industry suffered its worst ever losses, according to consultancy CRU Group.

"With steel prices moving up the way they have, that clearly puts the steel sector on a better footing in the short term," Mr Gait said in a phone interview this week. "We're seeing a reversal of the negative momentum last year and we're hoping to see some kind of stabilization."

The fortunes of the country's steel companies have been transformed as policy makers talked up growth and a credit-fueled binge revived property and infrastructure spending. Steel reinforcement bar used to strengthen concrete soared to 2,787 yuan (S$578.20) a ton in April, the highest intraday level since September 2014, and inventories have shrunk about 28 per cent in eight weeks, according to Shanghai Steelhome Information Technology Co.

Losses among China's producers will narrow to about 10 billion yuan this year and they may even make a profit, accordingto the China Iron & Steel Association last month. The mills posted more than 100 billion yuan of losses in their core business in 2015, the group said earlier. The body sees exports sliding 11 per cent to 100 million tons this year as local demand strengthens.

Chinese steel production shrank last year for the first time since 1981, contracting 2.3 per cent to 804 million tons, government data show. Output of 70.65 million tons in March 2016 was the most ever for a full month, but short of an all-time high when converted to average daily rates.

Increasing supplies mean the surge in domestic prices is not sustainable, Fitch Ratings Inc. said in a note in April, adding that output probably increased further last month as suspended mills were fired up.

The jump in futures was also fueled by retail speculators piling into the market in the hope of profits, spurring exchanges to raise transaction fees and margins to make trading more expensive. That's triggered a drop in prices, with rebar slumping 18 per cent from its intraday peak on April 21 and posting its worst weekly performance since trading started in 2009.

Production expanded in April and could increase further in May because of the opportunity to make money, Curtis Zhu, a London-based analyst at consultancy Wood Mackenzie Ltd, said by phone. Supply is rising even as the government seeks to cut as much as 150 million tons of capacity over the next five years.

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