China's 'zombie' steel mills fire up furnaces, worsen global glut

SHANGHAI/MANILA - The rest of the world's steel producers may be pressuring Beijing to slash output and help reduce a global glut that is causing losses and costing jobs, but the opposite is happening in the steel towns of China. While the Chinese government points to reductions in steel making capacity it has engineered, a rapid rise in local prices this year has seen mills ramp up output. Even "zombie" mills, which stopped production but were not closed down, have been resurrected. Despite global overproduction, Chinese steel prices SRBcv1 have risen by 77 percent this year from last year's trough on some very specific local factors, including tighter supplies following plant shutdowns last year, restocking by consumers and a pick-up in seasonal demand following the Chinese New Year break. Some mills also boosted output ahead of mandated cuts around a major horticultural show later this month in the Tangshan area. Local mills must at least halve their emissions on certain days during the exposition, due to run from April 29 to October. China, which accounts for half the world's steel output and whose excess capacity is four times U.S. production levels, has said it has done more than enough to tackle overcapacity, and blames the glut on weak demand. But a survey by Chinese consultancy Custeel showed 68 blast furnaces with an estimated 50 million tonnes of capacity have resumed production. The capacity utilization rate among small Chinese mills has increased to 58 percent from 51 percent in January. At large mills, it has risen to 87 percent from 84 percent, according to a separate survey by consultancy Mysteel. The rise in prices has thrown a lifeline to 'zombie' mills, like Shanxi Wenshui Haiwei Steel, which produces 3 million tonnes a year but which halted nearly all production in August. It now plans to resume production soon, a company official said, declining to be named as he's not authorised to speak publicly. Another similar-sized company, Jiangsu Shente Steel, stopped production in December but then resumed in March as prices surged, a company official said. More than 40 million tonnes of capacity out of the 50-60 million tonnes that were shut last year are now back on, said Macquarie analyst Ian Roper. "Capacity cuts are off the cards given the price and margin rebound," he said. -Reuters