China's slowing demand for steel is driving Chinese exports of the metal to the highest level in more than three years, flooding the Asian market with supplies at a time when producers such as South Korea's POSCO are grappling with thinning profits.
Europe used to soak up most of China's steel exports, but the region's protracted debt woes have forced producers like Baoshan Iron & Steel to turn their shipments to destinations closer to home. The wave of cheap Chinese exports has fuelled price undercutting among Asia's top mills, which are expected to report profit slumps for the three months to June.
POSCO backed by billionaire investor Warren Buffett, is expected to see its operating profit fall by a third from a year ago, analysts say.
"Before, China was exporting 2 million tonnes per month and now it is suddenly 5 million tonnes. Given that domestic demand in their respective countries is already not particularly strong, they (local steel producers) are clearly afraid," said Helen Lau, a commodities analyst at UOB-Kay Hian in Hong Kong. "China will continue to export at a high rate for the rest of the year. I understand they (the Chinese steel mills) are making very little money from exporting, but it is still better than closing down their plants and laying off their staff."
China boosted first-half exports of the metal used in cars and construction to 27.26 million tonnes, the highest for a six-month period since 2008, as domestic consumption ebbed and inventories ballooned.
Traders say stockpiles of steel products in major Chinese cities have surpassed 15 million tonnes — enough to build around 350 of Beijing's National Stadium, also known as the Bird's Nest Stadium because of its striking design.
Newly-started property construction in China slumped 16.3% in June from a year earlier, extending the 4.6% drop in May and cutting demand for steel.
The supply glut will likely overshadow any hopes of Beijing's policy action to stimulate an economy that is growing at the slowest pace in more than three years, signaling that the ailing sector has yet to find a bottom, analysts say