Hard landing for China’s steel sector?

Hard landing for China’s steel sector? China’s steel sector is close to experiencing a hard landing as most companies in the industry are losing money or just breaking even, according to Alex Latzer, the head of metals & mining research at Daiwa Capital Markets. The glut in China’s steel sector needs to be addressed soon or the industry will be forced to slash prices, he told CNBC on Thursday. Already, industry leader Baoshan Iron and Steel (Baosteel) has lowered prices for July delivery of its products by $15-30 per metric ton. “[The industry needs] to ratchet back the production more in line with the demand otherwise you are going to see prices fall further,” Latzer said. Key industries that China's steel makers rely on, such as construction and automobiles, have seen falling sales in recent months. In May, auto sales in China fell 3.98 percent on year, the second straight month of declines. Like other sectors in the country, the steel sector has also been hit by Beijing's clamp down on excess liquidity. “Credit liquidity is quite tight, so no one is really restocking right now,” said Latzer. According to him, the industry suffers from a problem of excess supply because small mills, which account for almost half of the supply in China, are willing to continue to produce steel even if their margins fall to wafer-thin levels. That's because such companies are not publicly listed and they don't have to answer to shareholders, meaning they could continue to operate for small amounts of cashflow. They are also wary of shutting down mills, given that the cost of restarting a furnace is quite high. Latzer believes the Chinese government's efforts to consolidate the steel industry in order to have better control over prices have not been successful yet. He expects global demand for China's steel industry to decline, especially after the Federal Reserve’s downbeat outlook for the U.S. economy and he's turned more bearish on domestic demand as well. “In China, we see growth slowing. Also, we expect one more interest rate hike coming in July [as] CPI will probably push up around 6 percent. So the decelerating situation means challenges for material suppliers.” Despite the difficulties facing the steel industry, Latzer is positive on Baosteel, saying it will benefit from Beijing’s consolidation effort, as well as its exposure in high-value steel products for sectors such as autos, appliances and the electrical industry.