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The Chinese Hangover: As Infrastructure Spending Drops, So Does Demand for Chinese Steel

August 16, 2012

The Chinese steel industry today shows many signs of serious economic difficulties brought about by the unprecedented size and speed of industry expansion.

-Raja Mukherji, executive vice president, Hong Kong, PIMCO

  • The Chinese steel industry today shows many signs of serious economic difficulties brought about by the unprecedented size and speed of industry expansion. 
  • However, as the country's focus shifts away from public investments and toward tax cuts, it will be difficult for China to absorb this overabundance of domestically produced steel.
  • Ripple effects of this oversupply may include softening iron ore prices, a possible drop in the Australian dollar, and potentially weaker global steel prices. 

China's 2008 economic stimulus programs may have been necessary for stabilization, but they appear to have been too large, too intensively focused on fixed assets and too heavily concentrated on construction. All this stimulus led to massive increases in domestic capacity for steel, cement and aluminum - while demand from export markets fell and property deflated amid financial tightening. As a result, these industries experienced massive excess capacity (see Figure 1, which shows domestic capacity and average utilization rates for steel in China).

 

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