Posted on 21 Apr 2022
Chinese steel market insiders concede that another on-year reduction in crude steel output this year is necessary, arguing that the country's steelmakers are focusing on quantity rather than quality in pursuit of profits, but they are earning very little from each tonne they produce a situation unhealthy for the industry's development. They also believe that achieving the reduction target set by the central government this year will be easier to meet than last year.
On April 19, China's National Development and Reform Commission (NDRC) suddenly declared that this year, China will continue to cut crude steel output, just as the government had announced last year when it mandated that production must fall below the 2020 total, as Mysteel Global reported. During 2021, China's crude steel output declined by nearly 30 million tonnes on-year to 1.035 billion tonnes, as reported.
Tuesday's news sparked considerable comment in the domestic steel market because prior to the formal announcement, while most market pundits had guessed that a further reduction this year was a possibility, the majority believed there would be no specific order given to control output like last year. They held that sufficient steel supply is needed to guarantee "stable economic development" this year, a goal which Beijing had emphasized repeatedly.
Steel market watchers were also surprised because the NDRC suddenly issued the directive at the beginning of the second quarter, unlike last year's order which was issued in December of 2020, Mysteel Global noted.
Though coming as a shock, Chinese steel market sources generally considered the reduction for this year as necessary and that NDRC had issued its directive at the right time.
"The current situation (of the steel industry) is at odds with achieving stable economic growth, where steel mills earn only marginal returns and steel end-users also make very little profit," Liu Huifeng, chief ferrous researcher of Donghai Futures observed.
He noted that raw materials prices and production costs of Chinese steel mills are "too high" – eroding much of the mills' profits – and yet on the other hand, the domestic mills' production is still recovering fast.
Mysteel's latest survey showed that as of April 15, around 25% of the 247 steel mills surveyed across China have been making losses, whereas over April 1-10, crude steel production across the 247 integrated mills and 71 electric-arc-furnace steel producers continued to grow, rising by another 0.5% from the seven-month high recorded over March 21-31 to average 2.8 million tonnes/day.
"It is essential to get raw materials prices down and lower the costs of steel mills. Otherwise, when domestic demand revives, steel prices will shoot up and contribute to higher inflation," Liu said.
At present, Chinese steel demand is being seriously constrained by the country's ongoing hard fight against the COVID-19 outbreak. However, if the country can contain the virus spread and Beijing's series of policies launched to boost the domestic economy take effect, the market expects that steel demand will recover later this quarter, Mysteel Global notes.
Meanwhile, domestic sources believed the target of cutting steel output will be easier to achieve this year than last.
During 2021, and especially in H1, steel demand was too strong and the mills were reaping good profits, making them unwilling to reduce production. This year, however, "steel demand is poor at the moment, and steel mills are earning thin profits or even losing money," an official from a steel mill based in East China stated. "They are more willing to bring down production," he said.
Over January-March, China's crude steel output had already declined by 28.55 million tonnes on year to 243.38 million tonnes, as reported.
The decline should mean that "there is no need for very harsh control (over steel production) in the second half of this year," a Shanghai-based senior ferrous analyst also reckoned.
Source:Mysteel Global
