China Faces A Scenario Of ‘Hard-To-Believe’ Steel Shortage

There can be a shortage of steel for the world’s top steelmaker. A shortfall of the key product helps to explain a divergence between the price of the commodity it digs up with the alloy it’s made into, says iron ore miner Fortescue Metals Group Ltd., and it adds that China has a lack of rebar.

Citing closures in China of some steel producers, especially operators of induction furnaces, Fortescue’s Chief Executive Officer Nev Power said in a Television interview in Beijing on Monday that there’s a shortage of rebar. A basic item used to reinforce concrete is rebar, or reinforcement bar.

In recent years, China has been more associated with excess production, soaring steel exports, and sinking prices even though it makes half of the world’s steel. Cleaning of the air that’s polluted by smokestacks, promoting consolidation and pressing on with shutdowns of outdated plants are the current focus points of the Chinese government which has been spurred by the problems of the steel industry and egged on by Group of Seven policy makers. The focus has been the closure of induction furnaces, which use electricity, for the Chinese government over the past year.

“Induction furnaces typically make rebar and as those furnaces are closed down, it’s created a shortage of rebar and the prices have gone up,” Power said during the television interview. “The margins that are being made in rebar at the moment we don’t believe are long-term and as new production comes in, we’ll see those margins comes back to normal.”

While, due to projections that demand may slow in China and amid concerns about supply, iron has tumbled this year, the price for rebar has soared in contrast. With Shaw and Partners Ltd. and Liberum Capital Ltd flagging the shift, that’s a divergence from the pattern in recent years when they’ve moved in tandem. According to Metal Bulletin Ltd., down 27 percent this year, spot ore with 62 percent content was at $57.79 a dry ton on Friday.

Although analysts say that the trend may now be easing as other producers boost supply, there are signs of a possible shortfall with nationwide stockpiles or rebar in retreat. At present, inventories of rebar in China are at the lowest since December and it has shrunk every week since mid-February.

He’s seen a “significant change” in the relationship between the two, according to Power, and added that shifts in China’s policy on coking coal have also been behind the split between iron and steel. In order to boost efficiency, mills can respond by using more higher-grade iron ore when coal surges, as happened last year.

“The elimination of some induction furnaces has indeed led to a shortage of rebar in China,” Xu Huimin, an analyst at Huatai Futures Co. in Shanghai, said on Monday. “However, we may be reaching an inflection point as demand has started to weaken and supply is expected to increase.”

(Adapted from Bloomberg)

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