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China’s Steel Industry Hit Hard, With Impacts in Store for Economy

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Workers at a iron and steel mill in Shenyang, northeastern China’s Liaoning Province, in 2007. Masses of iron ore mines have shut down in China recently and steel prices are in freefall, indicating a potentially harsh reckoning for the economy. (AFP/Getty Images)

The dramatic fall of the price of steel in the third quarter this year has raised concerns about the Chinese steel industry and the economic health of the nation. The trend has caused 40 percent of iron ore mines in China to shut down, according to reports.

Since the beginning of this year, the price of steel in China has been in freefall. The third quarter prospective report issued by Changjiang Securities on Oct. 8 stated that the average steel price for the upcoming three quarters has dropped 12 percent compared to the same period last year.

Earnings for the upcoming three quarters for steel companies will continue to deteriorate as prices for steel and ore continue to drop. At the 2012 Chinese Steel and Technology Forum, Wu Xichun, Honorary President of China Steel Association, said the steel price is on the verge of total collapse. Loss would be inevitable for the entire steel industry for the month of August, according to China Securities Journal, a state-run financial publication.

Financial statements released by China Steel Association indicated that profit fell by 98.9 percent compared to the 7-month period from January to July last year for medium and large steel companies in China. Shen Wenrong, chairman of the largest private steel company in China told Xinhua “The profit gained from selling one ton of steel is less than the profit from selling one dish of fried pork.” l

China’s large scale steel company Baoshan Iron & Steel Co. posted an announcement admitting that the Luojing Project, which the company purchased at 1.4 billion RMB to expand productivity, has been stopped temporarily in order to avoid bankruptcy, according to a Sept. 27 report in China Securities Journal.

According to statistics from Goldman Sachs, the price of iron ore has dropped from $138 per ton to $87 per ton globally since the beginning of 2012 to the end of August. This has had a major impact on the price of iron ore in mainland China, according to Investor China.

On Sept. 27, the deputy secretary general of the Metallurgical Mines’ Association of China, Liu Xiaoliang, said the decline in iron ore prices has caused many firms to face a financial crisis, forcing approximately 40 percent of iron ore mines in China to stop production, according to Oriental Daily, a Shanghai newspaper.

“Iron ore, the commodity most leveraged to China’s growth and Australia’s biggest export earner, is heading for the longest bear market in 20 years,” wrote Australia’s Sydney Morning Herald on Oct. 3.

Chinese industry experts have long considered the steel industry a barometer of the economic health of the nation.

“In the overall industrial landscape of China, the steel industry plays a pivotal role,” according to a International Financial News, a paper sponsored by state-run People’s Daily.

“The performance of the steel industry greatly influences the business of upstream industries such as iron ore and cooking coal, with far reaching impacts on the economic environment of a raw material-exporting country like Australia,” the article continued.

The steel industry also has significant implications for technology, the automobile industry, and the real estate industry, which, in China’s current growth model, effectively drives the whole economy.

As the Chinese economy took a turn for the worse this year, the slowdown of the real estate industry resulted in reduced demand for steel.

Wu Xichun, with the China Iron and Steel Association, said the steel industry is in a quagmire because of the four trillion yuan investment plan launched by the government in 2008, in an attempt to stave off the global financial crisis. That flood of money resulted in overproduction of steel, leading to a glut.

Read the original Chinese article.

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