China Cutting Steel Capacity

| About: Nucor Corporation (NUE)

According to Reuters and other Asian papers, China’s steel industry is heading for its first loss since 1995.

Demand is so bad that the Nihon Keizai Shinbun morning edition dated May 19, 2009 reported that the government is demanding that companies reduce excess capacity by 30%! With the steel group up yesterday, you have to ask yourself: do you feel lucky?

We are currently long Nucor (NYSE:NUE) and believe it is one of the best-managed firms, period. While NUE sells primarily in the US, a signal from China is valid and should be taken into consideration.

The bottom line is that profits come from volume and lack of it equals losses. We will keep a close eye on the news flow, but this goes against the common notion that China will save us and the GDP numbers are going to be above 6%.

Here is an except from the Reuters story:

China's steel industry may post a loss for 2009 as overproduction persists in a weak global market, Xu Lejiang, the chairman of China's largest steelmaker Baosteel Group, told reporters on Saturday.
The government of China, the world's largest steelmaking country, has vowed to crack down on producers that continue to raise output despite an oversupplied market.

This goes against a prior May 12th report from Reuters that suggested that the surge in iron ore was sustainable while soaring to record highs. It seems that soaring imports, caused by the cheaper cost of ore from India, would lead to oversupply going into June.

Putting more pieces together, we see that dry bulk shipping has benefited from this importation. So, will the mass importation of cheap ore continue, or will the government crack down to keep prices stable? Either way, the news suggests oversupply. Not good.

Disclosure: Long NUE at time of writing.