Nucor’s Chairman Weighs in on Chinese Capacity Cuts
What You Shouldn't Miss in Nucor's 1Q16 Earnings
Chinese capacity cuts
There have been a lot of announcements from China over the past couple of quarters. Last year, China announced that the country will curtail its aluminum capacity. This year, China reiterated its commitment to cut excess capacity in the steel and coal sectors. Chinese announcements have a significant impact on commodity markets (USCI), and Chinese and global steel prices ticked up on hopes that the overflow of excess steel from China would decline to some extent.
Seeing is believing
During their 1Q16 earnings conference call, Nucor (NUE) Chairman John Ferriola said of expected Chinese curtailments that “seeing is believing.” Ferriola is not wrong in being a skeptic about China reaction to the announcement.
Chinese steel production hit a record high in March. Chinese steel exports, which had spooked global steel markets last year, also rose by 30% YoY (year-over-year) in March. Despite all of the Chinese leadership’s talk of cutting excess steel capacity, Chinese steel exports surged by 8% YoY in 1Q16.
Global overcapacity
We should note that a sustainable recovery in global steel markets might be elusive, unless global overcapacity, especially in China, is addressed. It’s true that Chinese steel prices have bounced steeply this year, raising hopes that the worst is behind us. But the rally in Chinese steel prices has been mostly built on thin air. We’ve already seen steel mills raising their output to take advantage of higher steel prices. But higher Chinese steel production and the exports that would come from it might put pressure on global steel prices in coming months.
Undoubtedly, steel overcapacity continues to remain a big challenge for steelmakers like ArcelorMittal (MT), POSCO (PKX), and U.S. Steel Corporation (X). You can read more about the global steel overcapacity in “Is the Steel Industry Really Turning Around?“
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