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Chinese steel mills mull output cuts due to coronavirus: Platts survey


More than 30% of Chinese mills could cut steel production

Higher grade iron ore seen most impacted by squeezed margins, lower output

Half of the respondents see benchmark iron ore prices at $80-$85/mt CFR in Q1

  • Author
  • Analyst Crystal Hao    Analyst Sylvia Cao    Paul Bartholomew
  • Editor
  • Debiprasad Nayak
  • Commodity
  • Metals
  • Topic
  • Coronavirus and Commodities

More than a third of Chinese steel mills are considering cutting steel production due to rising inventories, a shortage of raw materials and weak downstream demand caused by the coronavirus, according to a recent S&P Global Platts outlook survey.

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The survey found that 35% of survey participants had already trimmed steel output or were planning to, while 23% said their operations were running normally so far. Some mills had wanted to bring forward maintenance of their steelmaking operations – which is a proxy way of reducing production – but were unable to do so due to lack of workers and equipment.

More than a third of respondents reported problems in sourcing raw materials, though half said there was no issue. There have been some logistical restrictions in China due to the coronavirus, with mills that use trucks to transport raw materials from ports are the most impacted.

"We have difficulties shipping raw materials from the port to mill. Our raw material inventory is not that sufficient; with some brands it's only 2-3 days, but it is higher for some other brands," a mill procurement official said.

Chinese steel, iron ore mills mull output cuts due to coronavirus: Platts survey

Almost 40% of respondents said rising steel inventories presented the biggest market challenge, with 27% noting the lack of downstream demand.

Around 22% of survey participants expected hot-rolled coil margins to average just Yuan 50-Yuan 100/mt ($7-$14/mt) in Q1; 15% believed margins could be at breakeven levels.

Due to the slow construction work restart, the outlook for domestic rebar margins was particularly bearish. A quarter of them said rebar margins could be "zero to negative" in Q1, with just 12% seeing margins of Yuan 150-Yuan 200/mt.

The survey found that 46% of respondents were working from home as Chinese steel industry participants gradually restart work after the extended Lunar New Year holiday. Many construction and factory workers will need to undergo a further 14-day quarantine period once they return to their workplaces. As a result, normal levels of activity are unlikely to occur until the end of February at the earliest, Platts noted.

Survey participants remained generally upbeat about iron ore prices, with 50% expecting the 62% Fe IODEX benchmark to average $80-$85/mt CFR China in the January-March quarter. Around 10% thought iron ore prices would be above $85/mt.

Some 31% said higher grade iron ore (65% Fe) would be the most impacted by current market conditions due to mills gravitating to lower grade material to offset falling steel mill margins and a reduction in steel output.

"Brazilian supply will be affected by the weather there so this will offset the impact of soft demand for 65%. Low grade supply will be sufficient for us," one mill official in northern China commented.

Platts spoke to 26 companies as part of the survey, including Chinese steel mills, domestic and international traders and some mining companies.