H2 steel output cuts swing back into focus in China

Speculation in Chinese steel circles about whether producers, large and small, will be obliged to rein-in their crude steel output during this July-December half is intensifying. After sitting quietly almost forgotten for several months, the issue has roared to life in recent days after two official documents began circulating in the market which seemed to suggest production cuts are a near certainty.

One document is a two-page notice, under the stamp of Economy and Information Department of East China’s Anhui Province, which invited representatives of 12 steel mills under its jurisdiction to attend a meeting on June 29 to discuss how to accomplish the province’s task of reducing crude steel output this year. An official with a mill present at the meeting declined to reveal the nature of the discussions, saying only that “no plans are finalized”.

Generating greater comment in the market has been a document released by a steel sector supervisory department in the Gansu provincial government in Northwest China which stated that “all steel producers must make sure crude steel output in 2021 does not exceed that for last year”. The steel department notice said that production cuts would be concentrated among those steelmakers in the province “with poor environmental protection performances, whose energy consumption is high, and which host relatively outdated technology and equipment.”

At the end of January, China’s central government announced its goal of reducing crude steel production this year, yet during January-May, output actually increased by 13.9% on year to 473.1 million tonnes, according to data of the National Bureau of Statistics.

The industry’s performance over the five months had prompted many pundits to question whether Beijing would stick to its original goal of lower output, noting how impossible the task looks. The emergence of these official notices, however, has reawakened the market to the potentiality �" and in parallel, fuelled speculation about how steelmaking operations might be affected in H2 and what the implications for finished steel and raw material prices would be.

“Those provinces where the messages originated �" Anhui and Gansu �" have limited steelmaking capacity, but in coming days and weeks, we might see more provinces declare their position on this crucial issue,” a Shanghai-based steel analyst suggested.

How soon other regions, especially major steel-producing provinces, might announce information regarding output cuts is something everyone will be closely watching, a Shanghai-based futures analyst agreed.

But he argued that now would be good timing to curb steel production. “It will be much easier now than in the good months in March and April, given that many mills are running at breakeven or are even making losses at the moment,” he said.

Indeed, Mysteel’s latest survey across 247 integrated steel mills nationwide showed the proportion of mills operating profitably was only 71% as of July 1, the lowest level since March 2018. Blast furnace capacity utilization among these mills had also declined to a 17-month low of 81% as of July 1, as Mysteel Global reported.

Given the low profitability and uncertainties over steel production levels going forward, some steelmakers in North and East China which had banked their furnaces at the end of June seem in no hurry to restart them. The makers had complied with government requests to idle production and so help reduce air pollution for the centenary celebrations of the Communist Party of China on July 1, as reported.

“Some mills are reluctant to resume all operations after the restrictions of the past four days,” an official with a Tianjin-based special steelmaker remarked on Friday. The makers were holding back to see if news about the possibility of output cuts might cause raw materials prices to suddenly soften, he explained.

“In fact, some steelmakers are holding a wait-and-see attitude now, as any related news (in terms of steel output cuts) will influence market sentiment,” he said.

Mills like his are very concerned about raw material price trends, he said, as the relatively high prices of iron ore since May, coupled with the softness of finished steel prices, have already meant that his company is losing money on some items it is producing.

Most Chinese steel market insiders believe that any curtailment of production this half will give support to steel prices and at the same time, exert downward pressure on raw materials prices. Yet others are undecided about the strength of the central government’s will to realise its goal and see steel production reduced this year.

“Sure, the prevailing concerns in the market are about Beijing’s curtailment plans but later, if there is less pressure from the central government (in terms of cutting output), it might be a slightly different story for steel and iron ore prices,” an analyst with a futures company in Southeast China’s Fujian province commented.

Written by Olivia Zhang, zhangwd@mysteel.com and Victoria Zou, zouyongjia@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.