The provincial governor of Hebei province said that by 2020 the government will shut down operations at 240 of the 400 steel mills that currently operate in the northern province that encircles Beijing. Hebei currently produces about a quarter of all the steel made in China.
The country’s slower economic growth rate has reduced demand for steel and caused prices to fall. At the end of February, we noted that global steel production had fallen by 7.1% year over year in January and that capacity utilization was just 66%. China, which produces about half the world’s supply of steel, saw output fall by 7.8% in January.
The closure of the Chinese mills over the next few years will put even more pressure on the iron ore and bulk shipping industries. Andrew Mackenzie, CEO of BHP Billiton PLC (NYSE: BHP), told a conference in Melbourne on Tuesday that the supply of cheap iron ore continues growing faster than demand. BHP is one of the world’s largest producers of iron ore, and Mackenzie said that of all the products his company produces, iron ore “has the greatest risk of price downside.” The answer for BHP and its competitors is lowering costs and hoping that demand will rise.
Iron ore prices shot up to about $63 a ton last week, but when China failed to implement further stimulus measures, iron ore prices dropped back to trade at around $52. Mackenzie said the spike in iron ore prices was the result of short covering, and given how quickly the price fell, he is probably correct.
According to a report at CNBC, Mackenzie remains positive on China:
The good news coming out of China is that they are managing the transition to more of a services-led economy.
They are taking advantage of the employment it gives them to restructure some of their heavier industries to make it more competitive, which does mean in the medium-term they are probably going to demand less commodities than people might have thought, but in the longer term they will demand more.
According to Caixin, over the next two years that transition in Hebei will cost the provincial government about 180 billion yuan (around $27.6 billion) and cost more than 1 million workers their jobs.