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RPT-COLUMN-Steel's structural shift lost in the political war of words: Andy Home

Home@ (Repeats Dec 1 column without change. The opinions expressed here are those of the author, a columnist for Reuters)

* China's steel production: http://tmsnrt.rs/2ALTxn5

* China's steel exports: http://tmsnrt.rs/2AMC5Pr

LONDON, Dec 1 (Reuters) - The Global Steel Forum declared that this week's meeting in Berlin had agreed an "ambitious package of concrete policy solutions" to tackle global overcapacity.

The forum, which grew out of the G20 but also includes 13 other nations, will now meet at least three times a year to monitor progress.

The optimistic official take on Thursday's proceedings, however, was short on detail and papered over political tensions bubbling just under the surface.

The United States isn't happy.

"The forum hasn't made meaningful progress on the root causes of excess capacity," the United States' chief steel negotiator, Jamieson Greer, said in a thinly veiled swipe at China.

China isn't happy either.

Assistant Commerce Minister Li Chenggang said that China doesn't want to be the one going through the "painful process" of capacity reduction "while the rest of the world just watches".

There is also the looming mid-January deadline for completion of the United States' Section 232 investigation into steel imports.

All of which might suggest that it's acrimonious business as usual in the steel sector.

Yet the multiple chain reactions set off by China's supply-side reform programme are only now starting to become apparent and the cumulative effect could end up revolutionising the entire global industry, even if no one in the G20 Steel Forum appears to have noticed.

Graphic on Chinese steel production:

http://tmsnrt.rs/2ALTxn5

Graphic on Chinese steel product exports:

http://tmsnrt.rs/2AMC5Pr

CAPACITY DOWN, EXPORTS DOWN

China has been closing steel capacity for three years now.

The official target is to eliminate 150 million tonnes by 2020. But that doesn't include the closure of "illegal capacity", mostly small-scale operators using scrap rather than iron ore.

This combination of official and unofficial closures has injected considerable confusion into the statistical picture, but analysts at research house CRU think that capacity has fallen by 240 million tonnes over the past three years to about 1,020 million tonnes this year. ("Chinese steel: on the brink of structural profitability", Sept. 20, 2017)

That is equivalent to shutting down every steel plant operating in the United States.

True, you'd be forgiven for not noticing, because actual production in China has never been higher. Up 6 percent in the January-October period, 2017 output is set to hit a record high.

Or rather "official" production is set for a record high. Since we never knew how much the "illegal" sector produced, the past is an unreliable signpost.

That said, higher visible output this year is first and foremost a reflection of lower invisible output.

In this statistical twilight zone, there is one indisputable trend, which is that China's exports are falling sharply.

It was the flood of Chinese exports in 2015 and 2016 that led to the formation of the Global Steel Forum in the first place.

Exports of steel products exceeded 100 million tonnes in each of those years, but outbound shipments have slumped by 30 percent, or 28 million tonnes, this year.

CAPACITY UTILISATION UP, PRICES UP

That has generated a positive first-stage effect for the rest of the world.

After registering negative growth in 2015 and no growth in 2016, production outside of China has risen by 5 percent this year.

Improved global demand is part of the equation, but lower Chinese exports are also playing an important role in other steel-producing countries such as South Korea, which is on course to register higher output for the first time since 2014.

But there are also important second-round effects from these capacity closures.

Capacity utilisation in China's steelmaking sector has been rising and, according to CRU, should come in at just less than 85 percent this year. Given the government's commitments to further capacity closures next year, that operating rate could rise to almost 90 percent in 2020-21, CRU says.

Steel analysts don't get to model such high utilisation rates very often. The global rate in October was only 73 percent, the World Steel Association says, and it has been at that sort of depressed level for a long, long time.

At China's current rate of capacity utilisation, however, interesting things start happening with price and margin.

"The basis for pricing changes from cost to allocation - there is a shift from a buyers' to a sellers' market," CRU said.

Chinese rebar prices are hovering close to five-year highs and the country's producers, or at least those still in business, are enjoying record margins.

And higher domestic Chinese prices translate into higher-priced exports, which then translate into higher steel prices everywhere else.

FUNDAMENTAL CHANGE

CRU's conclusion is that "the structure of the Chinese steel sector has changed fundamentally over the last 18 months", leading to higher capacity utilisation, lower exports and higher pricing.

It doesn't seem that anyone at the Global Steel Forum has noticed this shift in fundamental steel dynamics, least of all the U.S. delegation.

There is, it is true, a lot of excess steel capacity still around -- 737 million tonnes of it in 2016, according to the Forum.

About half of that was in China, the world's largest steel producer. But after three years of the increasingly draconian crackdown, its share is falling.

And that, more than any Section 232 decision, is reshaping the rest of the world's steel industry as well. (Editing by David Goodman)