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Chinese steel under pressure: analyst

Keywords: Tags  steel, Accenture, John Lichtenstein, China steel demand, environment, Catherine Ngai

NEW YORK — Chinese steelmakers will have to remain flexible if they want to stay competitive, according to John Lichtenstein, managing director of Accenture Plc’s global metals industry practice.

China’s growth has slowed in recent years since the government backpedaled on steel sector investments, causing producers to face tepid demand and squeezed margins. While more stability was expected after the changeover in power earlier this year, the results have been less than overwhelming.

"When the market first slowed down, people attributed it to a number of factors, including the impending leadership change and uncertainty about that and the time needed to ramp up to the latest five-year plan, which was not yet fully in force," Lichtenstein told AMM in a recent interview. "In general, there was the hope and expectation growth would get back on track."

However, it has become apparent in recent months that the leadership will not take "strong actions" to stimulate steel consumption, and will instead maintain a more balanced approach when dealing with economic growth, he said.

"To some extent, since the first financial crisis China has overbuilt or at least pre-built a great deal of infrastructure," Lichtenstein said. "They built dozens of airports but didn’t have the passengers or planes for them. They greatly expanded the rail system, but ridership has been low as not enough people are able to afford to use it, with the result that the rail system is now losing money. There is (growing) recognition that in the current economic conditions, throwing more money at infrastructure brings with it declining capital productivity."

U.S. interests have claimed that Chinese overcapacity is causing a ballooning export market. But while domestic players have tried to combat Chinese imports by filing trade actions and pushing legislation on Capitol Hill, Lichtenstein said that its effects are only short lived.

"China will never do something because it’s pressured to do so," he said. "I think that, potentially, the turning point comes when the costs to subsidize losses, maintain all this capacity ... reaches a point where other costs and considerations begin to outweigh. When enough problems accumulate—that could tip the needle on strong action."

But on top of financial pressure, increasing environmental regulation may curb steel production. China, the world’s largest emitter of carbon dioxide, has pledged to address the country’s air pollution problems, an effort some say may have adverse affects on the steelmaking industry.

"There’s a heightened sensitivity to public views around environment and resources," Lichtenstein said, citing cases where public outcry against chemical plants led to cancellations of proposed projects. "We haven’t seen that in steel, but I think that’s one of the factors that the central government tries to weigh. Any plant that doesn’t follow the standards will be shut down. I think we’ll be seeing more and more of that happening."

But ultimately, the problem within China is not so much one of initiative, but rather one of priority.

"Within the central government’s efforts to manage overall economic growth and maintain social stability, there are a whole lot of different and sometimes competing metrics and objectives," he said. GDP growth and maintaining social order requires employment, but closing steel plants to meet energy or environmental targets negatively impacts GDP, employment and social order. "That becomes a trump card," Lichtenstein said. "At the end of the day, what concerns the leadership the most is the loss of social stability.

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