As the global steel industry grapples with deteriorating profitability due to oversupply originating from China, there are expectations that the Fourth Plenary Session to be held in China this week will discuss steel production cuts. China accounts for more than half of the world's crude steel (unprocessed steel) production, so whether it cuts production has a significant impact on global steel prices.
According to the industry on the 22nd, the agenda of the Fourth Plenary Session of the 20th Central Committee of the Communist Party of China, held from the 20th to the 23rd, includes the theme of "restructuring industries with excess supply." One of the industries receiving the most subsidies that have caused oversupply is steel. According to the Organisation for Economic Co-operation and Development (OECD), China's government subsidies for steel are five times higher than in non-OECD countries and more than 10 times higher than in OECD countries.
China has declared its intention to cut steel output at every major political event this year. At the Two Sessions (National People's Congress and Chinese People's Political Consultative Conference), China's largest political event held in Mar., it mentioned steel production cuts, and at the Politburo meeting in Jul., it hinted at cuts by saying it would manage corporations' disorderly competition. Last month, four government ministries, including the Ministry of Industry and Information Technology, announced, "Based on improved performance, better supply-demand balance, and optimized industrial structure, we will target an average annual value-added output growth rate of about 4%."
Despite a series of announcements foreshadowing production cuts, the industry believes full-scale cuts have not materialized. According to China's National Bureau of Statistics, China's cumulative steel output this year fell 1.7% year over year through May and 3.1% through Jul. According to Bloomberg, cumulative output through Sep. was down 2.9% year over year.
Baek Jae-seung, an analyst at Samsung Securities, said, "Although output decreased from a year earlier, prices did not rise. The market interprets this as a natural decline due to weak demand rather than government-led reductions by corporations," adding, "Production needs to fall further for prices to recover and market conditions to improve again."
Some say the current slump in steel demand resembles about 10 years ago when the real estate market was weak. At that time, Premier Li Keqiang came forward and announced plans to cut 100 million to 150 million tons (t), pushing steel industry restructuring. Baek said, "In 2015, China's steel industry was as sluggish as it is now, and when the 13th Five-Year Plan began in 2016, it included steel restructuring measures. There is a possibility that the 15th Five-Year Plan this time will also include steel restructuring and production cut plans and be implemented in earnest."
If China's production cuts materialize, domestic steelmakers' profitability is expected to improve further. Domestic steelmakers such as POSCO Holdings, Hyundai Steel, and Dongkuk Steel Mill saw their results deteriorate sharply due to the influx of low-priced Chinese steel. Jeon Bo-hee, a research fellow at the Korea International Trade Association's Institute for International Trade, said, "It is also burdensome for China to continue carrying the excess supply issue. There is even talk that it has set a production cut target of 50 million t, or 5% of total crude steel output (about 1 billion t). If that happens, Korea's steel industry will also get some breathing room."