Chinese Crude Steel Output Cut & Demand Riddle Deepening
World’s largest steel producer, consumers and exporter China is actively contemplating adding more curbs to halt environmental pollution, which most likely will reduce its crude steel output, increase import of semi-finished steel and dampen exports of finished steel in the remaining period of 2021. China Iron & Steel Association said on its Wechat channel on Sunday that “There will be more notable reductions in crude steel output along with government-led environmental checks, the, outlining the prospects for the steel market in the second half. Daily crude-steel output at major mills fell 5.6% in the first ten days of July from June, with most of the cuts taking place at plants in Shanxi, Hubei and Hebei provinces and mills including China Baowu Steel Group and HBIS Group. Steel exports may drop after the country imposed higher tariffs on overseas shipment. Domestic demand for steel will also slow in the second half after industries front loaded consumption.”
Chinese government’s attempts to cap steel output at below last year’s record 1,065 million tonnes have had limited success so far. In the first half of 2021, Chinese steel mills have churned out 12% more crude steel at 564 million tonnes and to achieve impossible goal of capping crude steel output in 2021, Chinese steel mills will have to reduce crude steel production in July-December 2021 to about 500 million tonnes, ie reduction of almost 10 million tonnes a month
Average monthly crude steel production
January-June 2021 - 94 million tonnes
July-December 2021 – 84 million tonnes
On the other hand, Chinese domestic steel demand remains unabated as the impact of Chinese stimuli to recoup economy post COVID continues and 10 million tonne shortage per month in crude steel production will surly upset the cart.
One possible scenario to feed domestic steel demand is reducing steel export volumes, which surged by 30% YoY in January-June 2021 to 37.4 million tonnes, ie monthly average of 6 million tonnes. Chinese government has already removed VAT rebates on exports on all major steel products. It is now contemplating imposition of 15-25% export tax on key steel products, which, if implemented, will result in upswing in global export prices.
To reduce the gap, Chinese steel mills have already stepped up import of semi-finished steel, billets & slabs, to run their hot band production lines, which resulted in surge in billet prices to USD 725 CFR China last month, only to ease this month slightly on bearish sentiments in steel futures & correction in spot prices. However, if Chinese steel mills are forced to cut crude steel production in H2 of 2021, likelihood of their importing substantial volumes of semis is quite high, which in turn will support billet export prices
However, as these are possible scenarios, we need to wait for actual developments in coming months to solve this riddle of Iron Fist vis a vis Market Realities