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China steel data masks scale of overcapacity


The mainland appears to have been routinely underestimating output from its sprawling steel sector, with official figures for last year alone 40 million tonnes below a key industry estimate - an amount equivalent to Germany's annual production.

Beijing has vowed to cut overcapacity in its steel sector, the world's biggest, but huge discrepancies in the data suggest that policies aimed at cutting emissions and modernising the economy are often not being implemented on the ground.

Cash-strapped local governments have an incentive to turn a blind eye to unauthorised but profitable steel production rather than risk job losses and mill closures by forcing them to comply with Beijing's new efficiency or emissions targets.

This means the extent of a glut in the steel sector is uncertain, making it harder for global miners such as Rio Tinto and BHP Billiton to forecast future sales of iron ore, the steelmaking ingredient.

"It is not satisfactory to have doubts about the accuracy of steel production statistics, particularly for a country as large as China with its importance to the global mining sector and steel supply," said Peter Fish, managing director at consultancy MEPS (International).

"How can the authorities make meaningful decisions about investment, rationalisation, emissions control, privatisation issues for an industry in which there is no consensus about the most basic statistic - the level of output?"

The China Iron and Steel Association (CISA) said in August that crude steel output stood at 822 million tonnes last year, more than 40 million tonnes higher than official figures from the National Bureau of Statistics.

While the bureau has not officially revised 2013 output data, growth rates for January-November this year imply last year's production was 803 million tonnes, 24 million tonnes more than originally reported, according to Reuters calculations.

And MEPS, which has been tracking the mainland's steel industry since the late 1990s, said it had seen indications of underreporting from around 2009-10. It believes the country has been underestimating its crude steel output by at least 30 million to 40 million tonnes a year since 2012.

Signs that the mainland has been churning out far more steel than initially reported come as iron ore prices hit their lowest since 2009 and the country's steel dropped to its weakest in about a decade.

This raises doubts over the sustainability of a strategy of iron ore miners like Rio and BHP to ramp up supply on expectations of long-term mainland growth.

A source at one international miner noted that the firm did not solely rely on official output data from the mainland, also looking at numbers from CISA.

But the association said it was difficult to compile accurate figures for the whole country.

"It is even hard to say clearly how many steel enterprises there are. Some are not part of our statistical remit and some appear and disappear, and we can only guess as to their output," the association's vice-chairman Liu Zhenjiang told a conference in October.

Rio, the world's second-largest iron ore miner and among the most aggressive in boosting output, has forecast the mainland's crude steel demand would reach about one billion tonnes by 2030.

But this year, the mainland's demand for steel shrank for the first time in more than a decade as its economy slowed, with CISA saying it dropped to about 620 million tonnes in January-October.

Accuracy worries also apply to its iron ore output data, with analysts baffled at how domestic production figures could keep rising while global prices have halved.

Official data shows the mainland's iron ore output up 5 per cent in January-November, though local media have reported that hundreds of domestic mines across the country have been forced to shut as prices dropped below US$70 a tonne.

Goldman Sachs analyst Christian Lelong said the lack of reliable data over the years had prompted the market to be overly bullish on the commodity.

"If a lack of [accurate] data led some producers to believe that iron ore prices would stay stronger for longer, then the lack of data means there was too much investment versus what the mining sector would have done if they'd had a better picture of Chinese iron ore mining."


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