The World Economy

Australia: Steel maker warns on overcapacity

THE head of Australia's second largest steel maker has underlined the bleak conditions facing the big miners, saying every major steel-producing country in the world is suffering from overcapacity.

SMH,

20 September, 2012

The comments from Arrium's managing director, Geoff Plummer, came as the Packer family's long-time financial adviser, Ashok Jacob, played down hopes that China would unleash another round of economic stimulus.

Perhaps more than any other material, steel has been critical to Australia's commodities boom. Prices of the nation's two biggest exports - iron ore and coal - were pushed to record highs by surging demand from steel mills supplying rapidly urbanising markets, chiefly China.

But in recent weeks spot prices have plunged due to weak demand from China's steel mills, many of which are believed to be losing money.

In a sign of this weakness, Mr Plummer yesterday said all of the world's big steel-producing regions, including China, Japan, Europe, and the former Soviet Union, were operating at less than 80 per cent of capacity.

''We've got a situation where basically in all key markets at the moment, there's overcapacity,'' Mr Plummer said in Canberra.

Despite this, he said China's industry had been operating at overcapacity for several years, and the long-term outlook was more positive.

Arrium was formerly known as OneSteel, but its name was changed to reflect its diversification beyond steel making.

Separately, Ellerston Capital director Ashok Jacob said the Chinese stimulus Australia's iron ore miners have been holding their breath for was not coming.

''Although China is an incredibly wealthy country it doesn't have the ability to use its wealth to create more stimulus,'' Mr Jacob told investors in Perth.

''You're not going to move on to a new glorious outcome in terms of commodity prices. I don't think [China] is going to fall apart, but I don't think they've got any bullets left to charge ahead at 7 or 8 or 9 per cent.''

China's appetite for the steel-making commodity was also unlikely to recover as the bulk of the construction boom had passed, he said. ''They've built enough roads, enough rail lines, the big-ticket cap ex has been spent,'' he said. ''By now the marginal return on new capital spending has got to be pretty close to zero.''

Billionaire mining magnate Andrew Forrest's Fortescue Metals Group last week cut as many as 1000 jobs as the sluggish iron ore price eroded the iron ore miner's profit margins. Mr Forrest has continued to argue that China would stimulate its economy once it had sorted out a leadership change and got inflation under control.

But Mr Jacob said even with $3.5 trillion worth of treasuries on hand, China could not stimulate its economy without hurting its export industry. ''They can't sell those treasuries because if they do that they will put upward pressure on the renminbi, which will destroy their export industry,'' he said.

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German City Needing Aid Shows Debt-Crisis Tentacles

Businessweek,

18 Sepetmber, 2012

Offenbach, a city of about 120,000 people neighboring Germany’s financial capital Frankfurt, is so mired in debt it had to ask the state of Hesse for a 211 million-euro ($277 million) bailout in June.

In so doing, it became one of the largest of 102 municipalities to tap 3.2 billion euros of aid Hesse is making available as the first of Germany’s 16 federal states to introduce a formal rescue fund for struggling towns and cities.

Offenbach, in Frankfurt’s shadow as the financial center rose to prominence during the past two decades, has lost its place as an industrial hub as household goods maker Rowenta Werke GmbH and printing-press maker Manroland AG cut production at their factories. As Germany, the biggest national contributor to euro-area bailouts, pressures indebted European countries to cut down on spending, its own cities are buckling in the absence of a mature municipal bond market and as public-finance lending shrinks in the wake of Europe’s sovereign debt crisis.

“The financial situation of Offenbach is not sustainable,” said Michael Beseler, who was the city’s treasurer until Sept. 6. “The rescue package by the federal state of Hesse is not enough and is only a step in the right direction.”

Steel makers crippled by overcapacity

Global Times,

18 September, 2012

Over the past decade, the growth of China's steel industry has dramatically outpaced market demand. For example, in 2008, China's total steel production capacity nationwide stood at 680 million tons, while the market only required 530 million tons.

This sort of blind expansion has crippled the steel industry. According to the China Iron and Steel Association, the domestic steel industry's profits hit 2.39 billion yuan ($380 million) in the first half of this year, down 95.81 percent year-on-year, while more than one third of the country's steel makers were operating in a deficit during the same period.

But, with the output of Chinese steel makers accounting for nearly 8 percent of the country's yearly gross domestic product, local officials haven't let mills cut their production.

Beijing needs to act decisively to reduce steel output and keep prices stable.

Car and light truck sales represent a large enough part of the consumer economy to be a reasonable proxy for optimism, pessimism, the desire of people to hold what money they have, or to part with it even if through the use of credit. European car sales numbers for August marked another abysmal low point, another nail in the coffin of the region’s finances.

Car Sales Crater in Europe

24/7 Wall Street,

18 September, 2012

The European Automobile Manufacturers Association (ACEA) reported that new car sales dropped 8.2% in August. The figure is reminiscent of those in the United States over the course of the Great Recession. The data also signals what most analysts already have said: overcapacity and overemployment in the auto industry will not go away. And efforts to close car factories and lay off workers are being blocked now by powerful unions and national governments.

Unfortunately, the figures confirm the extent to which the Germany economy is slowing down. Registrations in the European Union’s largest economy dropped 4.7%. German car sales were 226,455, against 688,168 in August. As goes the German car market, so does much of the success of the area’s car manufacturers.