SUBJECT: Some Chinese bearing steel producers claim to be reaching their production limits. As demand is up for bearing steel, China is raising prices and pushing out production causing distress for many companies. However, the worldwide industry is flush with capacity, so what is really happening with China? Dave Hull, P.E. uses his 40+ years of experience to explain reoccurring trends and future predictions of the growing issue.
Hang on, this roller coaster is only past the first hill, and what’s on the way just might make your stomach turn. With all of the mixed signals coming out of the Chinese bearing steel industry, it’s difficult to decide what to believe. To begin we’ve been told the major players are at 98% capacity. Others are having severe financial problems. While business may be hot for some, the steel furnaces are going cold for others.
In order to fully understand the issue, you must first understand the playing field. The Citic group (Xingcheng and Daye) remains the largest producer of bearing grade steel in China, representing 41% of the market, roughly 4 times the size of the number two producer. Comparatively, The original top-quality bearing grade steel producer and the only game in town 20 years ago, BaoWu Shanghai #5, is now the eighth largest with 3% of the market. Additionally, the production rate of Chinese bearing steel producing companies ranges greatly, from as high as +42% for some, and as far down as -17% for others.
Currently, steel prices are coming off of a 12-year low; however, the big players have shown 25.4% – 57.7% price increases over the last year. Is this talk about “shortages of capacity” simply a justification for these major increases?
In 2016 China produced 2,748,700 metric tons of bearing grade steel, an increase of 13.36% from 2015, however, at the same time China’s exports of bearing grade steel dropped by 14.72%. So why are prices going up and lead times moving out? Could this be because China is encouraging their bearing producers to export Chinese branded bearings while simultaneously moving toward higher precision classes (P5 and higher)?
The reality is, there is plenty of capacity worldwide for bearing grade steel and China is no different. China remains in the mindset of mass production. Many major Chinese producers of bearing grade steel are manufacturing driven companies that fill the high volume orders for high-volume melts of materials and sizes. All other, smaller orders using less material are pushed out. Historically China is reluctant to take the risk of staying ahead of these curves and their reactions are conservative at the expense of customer service. Additionally, China’s business philosophy seems to be the opposite of the West. When business is poor they won’t spend their resources to quote or make low-volume products, where as in the West a poor economy gets you lower prices, lower minimums, better lead times, and often better service. Leading indicators have shown for 4-6 months demand for bearings was set to increase. And now with economic curves all looking up, worldwide demand for bearings are already growing faster than the steel industry can increase production, resulting in price increases and late deliveries. If you are buying standard GCR 15 in standard size material, in high volume, with enough leadtime, you will likely be okay. It is the people using special sizes and products manufactured to non-Chinese specifications, such as SUJ2 and 100 Cr6, along with anyone buying products that are slightly different than China national standard specifications that will suffer.
Right now, OEM demand for finished bearings is up with expectations of major increases over the next year. OEM customers for bearings give their bearing suppliers a 1 to 3 month notice of increases, however the bearing producers frequently
cannot respond for 2 to 4 months which is usually, but not always, enough time for steel producers to respond. The supply chain rubber band gets stretched and hopefully it springs back before it breaks. Although I have heard many times over my 40-year career, “we won’t make that mistake again,” you can bet they will. Overall, we should expect things to get worse before they even out. Just like airlines reduce the number of flights to pack in the customers and raise prices, we are likely to see what the Chinese bearing industry feels they can get away with while demand is greater than supply.
The availability, price, and service scales are going to lean further away from the bearing steel users before they balance out. How long that will take will depend on the China bearing steel industry’s comfort with re-firing cold furnaces, and as they are not known for their risk taking, prepare for a challenging 2017. For all of those riding this roller coaster, buckle your harness a little tighter.