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The steel industry is about to go from bad to worse. China, the world’s biggest consumer of steel, needs less metal. The Chinese housing market, responsible for using the bulk of steel, is bulging with empty properties.
As a result, the country, also the largest steel producer, is swimming in the metal and exporting more to get rid of it. “Things are getting worse and I don’t see any possibility of a rebound in under three years,” said Tim Murray, managing partner with investment adviser J Capital Research Ltd.
“What I have seen actually is a deepening of the crisis.” Although the country is aiming for economic growth of 7.5 per cent – a healthy clip that miners hope will help turn the commodities market around – there are alarming signs China is struggling with the overcapacity in its steel industry.
Last year, China’s steel exports jumped 50 per cent. The surge came in the same year that steel consumption eased 3 per cent, according to the World Steel Association.
And that trend is continuing this year. China is on track to export even more than it did in 2014. It is also on track to consume less steel as the country grapples with an excess of residential properties – an overhang that will take a long time to work out.
“Who wants to build more when what you have got to worry about is getting rid of your inventory. And who wants to buy when everything is on sale and probably the prices will go down,” said Patrick Chovanec, managing director with Silvercrest Asset Management.
The surplus of steel has had a ripple effect throughout the commodities industry. Iron ore and metallurgical coal, used to make steel, have lost more than 70 per cent of their value over four years. Iron ore once traded at $190 a tonne in 2011 and is now about $60. Likewise, metallurgical coal used to trade around $300 a tonne and is now around $90.
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