Posted on 05 Jul 2021
After the deep downward corrections seen over late May and June, China’s steel market will “certainly” rebound this month on improved fundamentals and strengthened sentiment, according to Wang Jianhua, Mysteel’s chief analyst.
The pace of the decline in domestic steel supply may be “more than expected” in July, Wang maintained in the latest monthly outlook report, noting the sudden and steep falls in steel supply due to restrictions placed on steel mills at the end of June, especially on those in North China, to ensure clear skies for the centenary celebrations of the Communist Party of China (CPC) in Beijing, North China, on July 1.
The strict production curbs concentrated over June 28-July 1 will see hot metal output in North China’s Shanxi province fall by 42,000 tonnes/day, while in Tangshan city and Handan city – two key steel-production hubs in North China’s Hebei province – Wang estimates their molten iron output will decline by 338,600 t/d and 38,300 t/d respectively.
The reduction in output noted above may be just temporary, Wang believes, but in addition, steel mills nationwide are likely to lower their output further this month, either because they want to or because they are forced to in accordance with government directives.
At present, more steel mills are scaling down their output rather than continue to produce at a loss, Wang observed. Mysteel’s latest survey showed that as of June 24, the proportion of profitable mills among the 247 integrated steel mills surveyed nationwide was only 74.5%, a record low since the survey was launched on March 1, 2018.
Integrated mills contribute around 90% of Chinese steel production, and for the most part, they enjoy lower production costs than electric arc furnace-based steelmakers, Mysteel Global understands.
At the same time, Chinese steelmakers are facing pressure from local governments to lower steel output in line with Beijing’s wishes, Wang noted, which could lead many to throttle back production from July.
“Recently, the messages from some local-level governments about lowering crude steel output have been getting louder. The task is both urgent and heavy, so many steelmakers may plan to reduce output from this month,” Wang stated.
Earlier this year, the central government mandated that crude steel output in 2021 must be lower than last year’s and yet during January-May, crude steel production surged by 13.9% or 57.7 million tonnes on year to 473.1 million tonnes, as reported.
Wang predicted that crude steel output in June might be slightly lower on year, but in order to achieve Beijing’s goal, during this half year steelmakers will need to reduce crude steel production by 50 million tonnes. In other words, the monthly average over July-December must be reduced by more than 8 million tonnes/month, he stated.
“For some mills it is better they cut production now when they are making losses or meagre profits, than reduce it in months ahead when demand and profits will likely be better,” Wang said. If this argument is accepted, then this month an additional output cut of 5-10 million tonnes will probably be realised. He noted that some major steel producers in East China’s Jiangsu province have already lowered their planned supply to the market for early July.
On the demand side, in contrast, Wang forecasts that steel demand will improve slightly this month, thanks to better liquidity, and the resumption of construction work once the CPC centenary celebrations end. Steel demand will also be supported by continuing strong export demand too, both direct and indirect steel exports.
Tight liquidity led to poor steel demand in late May and June, but the situation will improve in July, Wang maintained.
On the one hand, local governments were slow in releasing bonds to some infrastructure projects. As of May, the release of government bonds for special use (mostly in projects related to people’s livelihoods) was only 16% of their annual quotas, much lower than the 40% in 2019 and 57% in 2020, Wang noted.
On the other hand, the controls many companies had placed on corporate budgets – to improve their H1 balance sheets for their semi-annual reports – may ease with the commencement of a new business half from July. This in turn may see enterprises lift their purchases of steel products, Wang’s report suggested.
Purchasing Manager’s Index results for the manufacturing and tertiary industries in UK and EU remain sound and will continue to support China’s direct and indirect steel exports in July, said Wang.
Source:Mysteel Global
