As Chinese iron ore inventory builds up, much attention has been devoted to the slowdown in the domestic economy.
What's under-reported is the fact that Chinese state-owned enterprises that dominate the steel sector are unlikely to cut production, even as demand for steel weakens.
Goldman Sachs' recent commodities tour in China showed that players in the Chinese steel industry see steel demand weakening and don't expect a government stimulus until well after the leadership transition, possibly as late as March 2013.
But steelmakers don't expect to cut steel production according to Goldman analyst Marcelo Aguiar. While this seems especially peculiar for state-owned enterprises that are taking the biggest hit in terms of profits, there is a pretty strong incentive for them not to. Employment.
"Common feedback was that smaller producers still generate some profit and large SOEs that are generating higher losses would not shutdown production given the impact on employment," according to a note by Aguiar. And this combined with lack of demand is expected to push local steel prices even lower.
We've previously written that Beijing is more concerned about employment than it is about economic growth, and this is why officials haven't launched a massive stimulus like the one they did in 2008.
Aguiar writes that while a bottom may be nearing, a rebound in iron ore prices is unlikely since steel demand in the fourth quarter is expected to be low.
With the recent buildup of iron ore inventories, Chinese state news agency Xinhua has warned that the short-term "downward trend" in iron ore is "irreversible".
