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China's power crisis, emissions cuts widen global steel output contraction rate

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China's power crisis, emissions cuts widen global steel output contraction rate

China's falling steel output pushed the global contraction rate from 1.4% per year in August to 8.2% per year in September, analysts from Commonwealth Bank of Australia said.

In September, Chinese steel production, which accounts for about 55% of global steel output, fell 21.2% year over year to 73.8 million tonnes, data from the World Steel Association showed.

The investment bank said in an Oct. 27 note that the decline was due to state-imposed emissions cuts on the sector's plants as well as energy constraints. However, excess production curbs at steel mills in Tangshan, Jiangsu, Zhejiang and Anhui in September are expected to result in increased output in October and November.

Future Chinese steel output may be affected by a deal brokered between the U.S. and the EU to immediately remove Section 232 tariffs on aluminum and steel, imposed during the Trump administration, as both parties aim to restrict access to "dirty steel from countries like China."

Commonwealth Bank of Australia analysts said steel output is a key demand driver for iron ore and metallurgical coal, two raw materials in steel production. A sour outlook for iron ore prices is expected to persist to 2022 due to reduced Chinese steel output.

In the third quarter, Vale SA's earnings were affected by the decline in iron ore prices, with the Brazilian mining giant opting to slash low-grade iron ore supply. As of Oct. 22, iron ore prices had fallen to $120.35 per tonne, from $136.95/t on Oct. 11, on news of continued steel supply curbs in China and scheduled winter production cuts amid power constraints, data gathered by S&P Global Market Intelligence's Metals and Mining Research team showed.

China continued to be Australia's primary market for iron ore, with the East Asian nation taking up about 78% of total shipments. However, China's share of metallurgical coal imports from Australia declined to about 3% due to the country's unofficial ban on Australian coal, which began in October 2020.

China power crisis hits upstream supply for industrial metals

In addition to steel output, upstream supply for industrial metals including aluminum, copper, zinc, lead, and nickel have been hit more by the energy crisis in China, Europe and India, compared to downstream metal demand, causing prices for the commodities to increase, analysts from Commonwealth Bank of Australia said in a separate Oct. 27 note.

The analysts said prices for the metals are expected to peak in the fourth quarter or in the first quarter of 2022 then ease through the rest of 2022, especially copper and nickel. An exception to this outlook are zinc prices, with the price easing to be limited on the expectation that supply for the base metal will tighten in 2022.