China's steel output to rebound in December; ease of credit to support markets

China's crude steel production is likely to rebound slightly in December from last month, as production ramps up at mills, offsetting fresh steel output cuts that are set to launch this month, industry sources told S&P Global Platts.

Although any steel output rebound in December could weigh on China's steel market as end-user demand is unlikely to improve at this point of time, the market will be supported by easing of credit borrowing in December and beyond, sources said.

Hebei production scenario

Tangshan, China's major steelmaking hub in Hebei province, is unlikely to further tighten steel output cuts in December, some local mill sources said. Local blast furnace utilization rates are already hovering around 65%.

"There will be extra output cuts at local sintering plants or blast furnaces when heavy air pollution hits the city, but this kind of output cut order will be withdrawn once weather conditions improve after a few days," a source said.

In late November, Tangshan upgraded environmental protection ratings of 10 steel mills from D-level to C-level, which means these mills would face additional extra output cuts to a smaller extent during severe pollution from December. These mills have a total crude steel capacity of around 41 million mt/year.

Tangshan has classified local steel mills into A, B, C, D levels based on their environmental protection performance. Currently only two mills rated A with a total crude steel capacity of 25 million mt/year are subject to no output cuts during heavy polluted weather, while those rated B, C and D have to slow their production at sintering plants or blast furnaces during the time.

B-level mills have the smallest reduction in output, with D-levels facing the largest production cuts. Specific output cut rates will be announced ahead of poor air quality forecast.

Meanwhile, Handan city, another steelmaking hub in Hebei, has recently announced to carry on output cuts into December.

Output cuts at local blast furnaces required by the city averaged 20% in December, S&P Global Platts calculations based on announced data showed.

However, output cuts for a large part of November were up to 30%, which means theoretically production by local mills could increase this month, some sources said.

Details of steel output cuts in January-February ahead of Winter Olympics remain unclear at the moment, but it would be unlikely that any mills would need to suspend their production entirely, mill sources in Hebei said.

Output scenario in other regions

Several major state-owned steel mills in northern, eastern and southern China will end steel output cuts in December, as output reductions over September-November were enough to keep their 2021 crude steel output within 2020 levels, according to sources close to the mills.

One source said mills that completed output cut requirements by end of November, including his company, in principle could ramp up production in December to the same level of what it was a year ago.

"But our company still plans to keep December steel output slightly lower than a year ago," he said, adding that other state-owned mills may follow suit in a bid to support the market during the slow season, while contributing to China's overall steel output controls.

Platts estimates over 50,000 mt/day of pig iron making capacity from these mills will be brought back on stream in December.

New maintenance works and output cuts are also said to be taking place in eastern and southern China in December, but they remain at a small scale and are unlikely to fully offset output resumption plans.

The biggest output cut heard in December is at a major mill in eastern China, which plans to reduce its crude steel output by 15%, or 11,300 mt/day, in December.

Credit policy eases

Some mill sources and traders expected steel demand from end-users to remain slightly weaker than steel supply in December, with this trend likely to continue into the first quarter of 2022.

However, an easing of the credit policy and market anticipation of more proactive monetary policies in 2022 could lend some support to the steel market, they said.

China has recently started easing credit borrowing to property developers and first home buyers with healthy outlook.

Some sources told Platts they expected more credit and monetary easing measures in 2022 aimed at aiding the property investment sector, while such a move would also support a recovery in consumption and manufacturing.

One trader said he did not expect any fundamental improvement in manufacturing or construction in the first quarter of 2022, as any policy measure may not start coming into effect until the second quarter.

However, improved market liquidity and anticipation of more credit easing would encourage traders to restock and enable the market to hold more inventories, the traded said.