China plans to reduce crude steel production by approximately 33 million mt over winter in an attempt to balance the spike in pollution during China’s winter heating season.
However, reports from Tangshan are that the air quality is currently bleak and the provincial government has responded by commencing capacity suspensions on October 12 2017 — ahead of mid-November as originally planned.
The cuts in utilization rates at Chinese crude steel plants ordered by the country’s central and provincial governments during the winter heating season are expected to impact 2+26 steel producing cities across the provinces of Hebei, Shandong, Henan and Shanxi plus Beijing and Tianjin.
These cuts have been communicated on an inpidual basis to mills with reductions in production from inpidual furnaces set at either 30% or 50%.
These cuts in output are viewed by S&P Global Market Intelligence (MI) as a necessary reform to China’s producers, with output increasingly being rationalised via direct intervention and microeconomic control.
Whilst the key driver for these suspensions is the environment, the industry will improve its cost-basis as smaller, less efficient producers are removed from China’s stock of steelmaking capacity.
The temporary reduction in production includes the blast furnaces and also sinter plants, although only the former has been clearly defined at present.
S&P Global Platts calculated that the cuts could impact approximately 33 million mt of production between mid-November and the end of March 2018 based on provincial steel capacity figures.
STRUCTURAL CAPACITY CUTS CONTINUE
These steel-related measures, among others, are to make sure that the spike in pollution witnessed in 2016 will not reoccur to the same extent this year — data from the U.S. Embassy in Beijing shows that particulate matter with diameter less than 2.5mm (PM 2.5) is low for October, yet other steelmaking areas continue to grapple pollution.
The Chinese central government has committed to 140 million mt of steel capacity reduction in the five years commencing 2016. In 2016, much of the capacity removed was already idled and the reduction target was reportedly overachieved at 65 million Mt against a target of 45 million mt.
The capacity reduction target for 2017 is approximately 50 million mt and, in May of this year, the National Development and Reform Commission (NDRC) announced that 42 million mt had already been mothballed.
Not included in this figure is the closure of the ‘ditiaogang’, or illegal induction furnaces (IFs). China’s NDRC announced that 120 million mt of IF capacity was removed in 2017 so far, however the actual amount is difficult to quantify due to the nature of the underground, unlicensed IFs. The IF plants are fed with scrap, and produced mainly rebar.
STEEL MILL MARGINS REMAIN STRONG
Downstream demand data indicate that strong growth is still being experienced for those products that consume finished steel on a large scale.
Demand from the residential construction and general machinery sectors have been especially strong — residential housing starts grew by 11.1% whilst general machinery growth was 10.6% in September this year, compared with 2016.
We expect this robust demand will continue in the near-term due to accommodative credit, on-going accommodation insufficiencies and strong replacement demand.
Steel mill margins have remained strong throughout most of 2017, buoyed by construction as well as by new infrastructure projects.
A reversal of the typical trend between rebar and HRC margins was observed in the June and September quarters this year, with rebar margins increasing above those of HRC.
The rebar market tightened due to the closure of the illegal induction furnaces, which supported higher prices.
A market for cheap scrap became available and led to other, legal steel mills increasing the volume of scrap they used in the blast furnace from an estimated average of 8% up to 15%, based on Platts’ research across Northern Coastal China.
The elevated margins have resulted in steel mills across China increasing the utilisation of the furnaces to lift production and take advantage of the elevated rebar and HRC steel prices.
The attractive economics of short-term production have led to many mills delaying maintenance periods that have typically been observed in the hotter months of July and August.
This decision came at a cost to some mills where, for example, a fire at one of Benxi Steel’s furnaces on September 1 shut down approximately 9,000 tonnes per day of production for a minimum of 16 days.
Delaying maintenance was thought to be the cause of the fire at the relatively new furnace. As many mills expected winter capacity cuts to be imposed, it made sense for them to hold off on scheduled maintenance until later in the year.
Steel mill margins have recently reverted to the typical trend seen at the beginning of 2017, with HRC commanding higher margins than margins for rebar.
A slowdown in construction is the driver as, during winter, a number of cities such as Beijing, Tangshan and Ji’nan have announced a total ban on construction activities in a bid to reduce dust pollution during the heating season.
Should more of the 2+26 cities follow suit, demand for rebar could soften.
IMPACT OF CUTS ON CISA MEMBER MILLS
China Iron and Steel Association (CISA) member mills comprise approximately 80% of total Chinese crude steel production.
The chart below shows that the composition of Chinese production has changed since 2015, with large (>10 Mt/y) and medium mills (3-10 Mt/y) increased by 17.9 million mt and 10.8 million mt respectively. Production from smaller mills (<=3 Mt/y) has reduced by 12.1 million mt.
While the number of mills included in the large and medium mills category has remained constant, smaller mills have seen a reduction in their numbers from 52 to 42 — whilst there are fewer smaller mills, the mills that remain are more productive.
This increase in productivity is in line with what has been observed during the closure of the illegal IF mills.
Typical blast furnaces have been able to fill the production gap left by the shuttered IFs and have increased their utilisation and production volumes.
Whilst this data covers approximately 80% of production, it is important to note that the non-CISA members could be impacted by the cuts to a greater extent.
2+26 CUTS IN A WORLD CONTEXT
This demand will have to be, at least in-part, satiated from other sources — the cuts to production are not expected to result in the full-scale production slowdown that the market priced in at prices of US$58/t in early October.
The main reason that this is likely is due to the large-scale profit margins that steel mills are currently enjoying and the fact that these 33 million Mt cuts only represent 3.2% of China’s steelmaking capacity.
Despite these curtailments to crude steel production, China remains on track to produce 844 million mt of crude steel in 2017.
Only 8 million mt of capacity reduction is required by the end of the year to achieve the 50 million mt target set for this year.
This is necessary for the affected 2+26 region as Beijing seeks to push for further improvements in its air quality over this auspicious political period.
WHAT DO THESE CUTS MEAN FOR SEABORNE PRICES?
MI expects 62% Fe seaborne prices of iron ore to fall gradually throughout the rest of Q4 2017 and in to 2018 and 2019.
These winter suspensions to Chinese steelmaking facilities will increase the amplitude and duration of volatility in seaborne prices as market participants struggle to clarify the impact on demand.
The impact is further obscured by potential policy changes in the wake of this week’s China’s 19th Communist Party Congress.
This pergent thinking is observed in the wide range of consensus price forecasts that are skewed to the downside.
MI expect 62% prices to average US$64.1/t in Q4 2017 albeit with prominent volatility and with continued environmental pressures to enact stronger downward forces on 58% Fe prices.
Premiums on direct charge material are expected to remain at elevated levels — the 58-62% Fe differential has been widening once more to an assessment of US$28.9/t on October 17.
Source: Platts
Pipe Industry Co., Limited (www.wilsonpipeline.com)
Flange Fittings Pipe China Supplier www.wilsonpipeline.com
Comments