For Global Steel Industry, China Poses Guessing Game

China is the world's largest market for steel. Yet the country's flawed statistics system presents a problem for steelmakers: No one knows exactly how much steel China produces or consumes.
The country attracts close scrutiny from the global steel industry. Producers in Europe, North America and Asia boost or cut output, in part, based on Chinese demand. Prices and inventory levels, as well as the purchase of raw materials such as coal and iron ore, reflect the health of the Chinese market.
But without firm data from China, calculating global steel supply and demand—and hedging accordingly—becomes a guessing game.

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A steel mill in Anhui province. China's steel output rose 7.1% in April.

Indeed, some Chinese steelmakers readily say they don't see why they should take the time to report their steel output. "Report our production? No, we don't need to do that. No one asked us to report our production figure," said a man with the surname Meng, who identified himself as the manager of a steel plant year in Huanxizhuang, a village in the northern province of Hebei. When asked, he said the plant makes 300,000 metric tons of steel a year but doesn't report the output to the government.

Likewise, the manager of a nearby plant in Xinjuntun township, with the surname Wen, said he sees no need to publish details of what he said was his site's 400,000-ton annual output: "We are a privately run enterprise, who do I need to report to?"
On Friday, the World Steel Association, the industry's statistics repository, estimated that China's booming industry produced 7.1% more steel in April compared with the same month a year earlier. China produced a record 625 million metric tons last year, and 2011 is also on track to be a year of record output for the country.

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The World Steel Association bases its production estimate on figures supplied by China's national bureau of statistics and the China Iron and Steel Association. The national association, which says it represents about 75% of the country's steel producers, including Wuhan Iron and Steel Co. and BaoSteel Group Corp., the country's biggest maker, relies on its members to voluntarily submit accurate production figures.

The figures indicate that China has been focusing on producing steel and making sure buyers were available for it, rather than also tracking steel inventories. The data don't include hundreds of smaller independently managed steel mills that don't often report production or don't report it fully for political and logistical reasons.
"There is an area where we do not actually have clear sources," said Soo Jung Kim, spokesman for the World Steel Association, based in Brussels. Still, he said the association is confident in its numbers.
Peter Fish, of MEPS Ltd., a steel consultancy based in the U.K., said he believes underreporting is, in part, the result of political pressure on the industry "to meet longstanding targets" to close inefficient steel mills by the end of last year. "On paper this has been successfully achieved, but in reality many of these mills continued producing and avoided closure by not submitting" output data, he said.
Mr. Fish said he believes the figures put out by China's national bureau of statistics and the China Iron and Steel Association undercount actual production by 45 million tons, or about 7% to 10% of reported production in 2010. Smaller steel companies can escape notice because they sometimes generate their own electricity and the country's grid system is undeveloped. Instead, they make mostly low-grade steel in coal-powered plants.
"Nobody really knows how many steel companies are in China," said steel analyst Charles Bradford of Bradford Research Inc. Mr. Bradford said the Chinese data is so unreliable that for the past 30 years, he has paid attention more to the electrical consumption in the country to help aggregate and measure how much steel production is likely increasing. He said that not knowing how much steel is being made can lead to volatility in the global market.
Steel, unlike copper or other basic and precious metals, isn't traded through an exchange such as the London Metals Exchange. Instead, steel is bought and sold generally through privately negotiated sales between a steel mill or service center, which acts as a middle man, and a steel user, such as an auto plant.
There could be far more warehoused steel in China than other producers realize. If the Chinese economy softens, much of that steel could be exported, which could cause prices to fall around the world.
China's steel prices have started to rise in the past month as the winter slowdown fades, but prices generally are still below—by 10% to 15%—prices in North America and some parts of Europe. The rest of the steel industry is watching whether prices in China will drop again this summer, an indication that there is more supply than demand in the country.
Peter Marcus, steel analyst for World Steel Dynamics, said that China's tax policy has also encouraged higher steel-inventory levels. China imposes high taxes on raw steel exports, as a way to encourage keeping the steel in the country and using it to make higher-value products, such as automobiles, appliances and engineered products. Those finished goods can then be exported.
Smaller steelmakers, who have tended not to report output, may be forced to warehouse steel that they could have otherwise exported if taxes weren't so high.