Posted on 10 May 2021
The surges in the prices of the series of ferrous products including steel, iron ore, and coke since April, have further divided the ferrous market sources in and out of China on their views regarding the possibility of China’s steel output cuts despite Beijing’s reiterations, as steel demand both in and out of China has been robust and steel margins have been high at Yuan 600-1,000/tonne ($93-155/t) depending on products.
China’s Ministry of Industry and Information Technology reiterated since late January to trim the country’s crude steel output on year for 2021, but in sharp contrast, the country’s crude steel output surged 15.6% or 37 million tonnes on year to 271 million tonnes over January-March, and the nationwide output may grow another 10 million tonnes on month for April, Mysteel estimated.
The robust steel output up to April, thus, has seriously divided the ferrous market sources into two groups, with one believing that Beijing will deliver what it proposes, while the other seriously challenging how it is achievable now that steel demand and prices have both been working against a production cut, and the Chinese steel mills have been churning out as much crude steel as possible.
What are market sources saying on this?
“It looks like mission impossible,” commented a steel analyst based in the U.S. “So far only Tangshan has been doing something about lowering its steel output, but whatever cut it has achieved has been made up by even higher steel production from elsewhere in China,” he said.
“I have confidence in Beijing, I am just not sure whether the local authority, with the pressure of local GDP, will listen to the central government especially when both demand and supply have been running rather healthily,” he added.
On May 6, China’s national price of the HRB400E 20mm rebar hit the highest since Mysteel commenced the assessment on March 3 2011, hitting Yuan 5,489/tonne ($844/t) including the 13% VAT, and Mysteel SEADEX 62% Australian Fines hit a record high, or having exceeded $200/dmt for the first time since Mysteel commenced the assessment on January 4 2010, reaching $201.15/dmt CFR Qingdao.
All the record-high prices are expected to further fume the enthusiasm in China’s ferrous market, making it even harder for Beijing to cool down the crude steel output frenzy, some market sources added.
“Steel price surges and higher steel margins will also inspire the steel mills in the rest of China to further ramp up their output via maybe using more scrap, so I do not know whether Beijing want to target less pollution or lower steel output, the former could be achievable, but not the latter to me,” he added.
Liu Huifeng, a ferrous analyst from Shanghai-based Donghai Futures also felts that the purpose of national steel output cut should be more about carbon emission cuts.
“In the long run, carbon emission reduction in the steel industry can be achieved via adopting new technologies such as hydrogen metallurgy, but curbing steel output is an immediate solution to see some results, and in that aspect, China has already made process by using higher grade iron ore and more scrap,” he said, noting that the change in feedstocks will reduce coke consumption.
An Indian steel analyst shared the doubt on the possibility of a lower steel output for China in 2021. “I have been talking to some other analysts elsewhere in the world, and they agree that a flat year in China’s steel output for 2021 after an almost 16% growth in the first quarter is already some achievement for the country,” he said, “and if steel output starts to fall on year, it will only lead to higher steel prices in China amid the robust demand, making it hard to control steel and iron ore prices, isn’t that against Beijing’s wish?” he questioned.
“So far, the upward spiral in many ferrous prices including steel, coke and iron ore is already unbelievable,” he added.
Many market sources in China, despite admitting that trimming steel output under the present circumstances appearing very challenging, still strongly believe that the goal will be achieved by the end of 2021.
“Beijing would not have repeated this if it were not determined, and as long as it wants, it can even command all the Chinese steel companies to shut down (in order to achieve the goal),” said a second Shanghai-based source that have been in China’s ferrous industry for years, joking about the “command” part.
Many market sources, however, expect the harsh measures will be implemented sometime later this year instead of in the immediate future, and Liu is one of them.
“For now, the government has been focusing on scrutinizing any illegally-erected new steelmaking furnaces or resumption of illegitimate old capacities, as they are viewed as a key contributor to higher output,” he said, adding, “and then, Beijing may issue some curbing measures mainly on those steel mills that fail to meet the emission standards”.
China’s recent decision to remove the tax rebate starting May 1 on 146 steel products when exporting, and to lower imports tax on a number of elementary ferrous products such as pig iron and steel scrap is to pave the way for the future steel cut measure, Liu pointed out.
A Beijing-based economist agreed on the timing, adding, “For China, it is also crucial this year to achieve a 6% on-year economic growth, and Beijing will probably use the first half of this year to lay a solid foundation, and it will only deal with steel production once this is achieved.”
The best solution?
To some, the most efficient way to lower output is not working out some measures on curbing output but to chill steel demand in China.
“Unless Beijing wants to rein in on steel demand, otherwise, steel output will not come down, as the supply gap can’t be filled up simply by more imports and lower exports, with a big question mark on whether China’s steel exports will drop even with the tax rebate removed, as HRC, for example, the margin is at around $300/t for China’s exports to the U.S. nowadays,” the U.S. analyst pointed out.
The second Shanghai source agreed with the U.S. analyst.
“Output is determined and driven by demand, so output will come down itself should demand be under the control, that is how a market economy works,” he stated.
Recently, some steel end-users such as construction project contractors, automakers and home appliance manufacturers have been complaining to Beijing about too high raw materials prices, and to them, steel is the one of the raw materials, and some of them have been forced to scale down the pace of operations in rising costs, Chinese market sources noted.
The ripple impact may take some time, though, to reach the Chinese steel mills, as by April, the country’s Purchasing Managers’ Index (PMI) for the manufacturing industry had been hovering in the expansion zone since March 2020, though it inched down by 0.8 basis point on month to 51.1 for April, Mysteel Global noted.
Source:Mysteel Global
