Posted on 17 Dec 2021
China cemented its ability to walk the talk on decarbonisation in 2021 by slashing its steel output by nearly a third from its peak run-rate in May. Its ability to maintain that constraint will be the main driver of its ferrous markets in 2022.
Curbs on steel production were arguably the single most important driver of markets in the second half of 2021, halving iron ore prices and supporting steel prices amid a slowdown in real estate activity. By October, China had slowed its monthly steel output by 28pc to 71mn t from a record 99mn t in May. January-October crude steel output fell by 0.7pc on year, putting the country on course to finish below 2020's 1.065bn t.
Winter steelmaking cuts are likely to wipe out potentially 47mn t of iron ore demand in the first quarter of 2022 in Hebei, Henan, Shandong, Shanxi and Tianjin, an Argus survey of market participants found. Mills in the Hebei-Tianjin region and its surrounding 26 localities must cut first-quarter output by 30pc on the year. In the same period this year, the region produced 111mn-113mn t, participants estimate. China's iron ore imports during January-October fell by 4pc to 975.2mn t, and that trend is unlikely to reverse, with China possibly achieving its peak crude steel production rate in 2021, some participants said.
The Argus ICX 62pc iron ore fines index fell from a record $235.55/dry metric tonne (dmt) in May to a one-year low of $87/dmt in November, before rebounding above the $100/dmt level into the year-end.
One wild card for iron ore prices is supply, with the La Nina weather pattern forecast likely to persist until late summer or early autumn in the southern hemisphere. But the market is cushioned by a build-up of China's port inventories to above 155mn t in early December, the highest since June 2018.
High domestic and export steel prices in 2021 allowed mills to absorb the record surge in iron ore and met coal prices. In a deviation from previous years, Tangshan, with more than a tenth of the country's steel production, made steelmaking cuts throughout the year rather than restricting them to the winter season. It is among the localities required to cut first-quarter output by 30pc on the year.
Pollution controls during the Beijing Winter Olympics in February will also curtail output. But for the remainder of the year, the push for decarbonisation and economic reforms will dictate the trajectory of markets.
China's biggest steelmakers and its state-run think-tank, the metallurgical industry planning and research institute (MPI), have said that peak steel emissions could come between 2022-2025. But those estimates came before Beijing began a deleveraging of its real estate industry and other major reforms for "common prosperity". Next year may well determine whether 2020 was indeed the peak for Chinese steel production.
"Steel output next year may still be higher than 2021, but it is expected to be below 2020," a metallurgical coke producer said, adding that "[Beijing] will roll out stimulus measures around the first quarter as economic growth has been on a slippery slope in recent months."
But most market participants surveyed by Argus said they expect steel output and demand to turn weaker in 2022 under the continued output and carbon emission restriction policies and a down-cycle for the property industry and exports. Steel demand will still ramp up during the seasonal peak construction period of March-April, lifting a floor on steel prices, participants said.
China's central bank began modest monetary easing in December by reducing banks' reserve ratio requirements and cutting some interest rates. This has shored up outlooks, but nothing to the level of this past year when output and prices at record-highs were observed.
In May, the fob China hot-rolled coil index hit a record $1,031/t and the Tangshan billet ex-works price rose to a record Yn5,770/t. Prices have come down well below those levels but are still relatively high for the winter off-season, supported by 2021's aggressive cuts to steel supply.
Source:Argus
