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China's steel output cuts could continue in H2, annual target may be readjusted

Highlights

Policy changes aimed at controlling prices: sources

20 mil-30 mil mt of steel supply shortage seen in H2

A recent call by China's Politburo for a correction in "campaign-style carbon reductions" is expected to mainly target China's thermal coal industry, while the nationwide steel output cuts will likely still be implemented in the second half of 2021, as curbing iron ore prices was the major reason behind it, market sources said.

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China's top planning body in a July 30 meeting said it was important to set the path to peak carbon emissions first before breaking old patterns.

The announcement led to a fall in the Chinese steel futures market. On Aug. 2, the most actively traded October rebar and hot-rolled coil contracts on the Shanghai Futures Exchange dropped 5.6% and 5.7% on the day to Yuan 5,414/mt ($838/mt) and Yuan 5,780/mt, respectively.

However, market sources said China's steel output cuts were not "campaign-style carbon reductions."

Mixed take on Politburo stance

The Xinhua news agency, the Chinese government's mouthpiece, said about the "campaign-style carbon reductions" July 31 that some local governments' aggressive actions on carbon emission reduction lacked overall planning, and could cause pressure on the emission reduction cost and adversely impact China's economic development.

However, market sources said the request on steel output cuts was initiated by the central government, a decision that came along with the removal of the scrap import tax in April and removal of steel export rebates in April and July.

All the policy changes have been well planned, aiming to curb iron ore prices through steel output cuts and raise scrap imports, a source said.

The steel output cuts that started from July have played a major role in helping cool down iron ore prices and propping up steel margins in the process.

China's domestic rebar and HRC sales profit margins increased $76/mt and $70/mt from July 1 to $53/mt and $109/mt on July 30, respectively, according to S&P Global Platts Analytics. Over the period, Platts IODEX 62% Fe dropped $40.9/mt to $180.5/mt.

Curbing iron ore prices remains a priority, indicating steel output cuts are expected continue in H2 2021 and even into 2022, some sources said. However, the annual output cut target for 2021 might be adjusted in a bid to meet steel demand, the sources added.

Readjustment in output cut targets

The Chinese government ordered steel mills to ensure the annual steel output in 2021 remains on par with 2020 levels.

This means during July-December, China's crude steel production has to decline by 59 million mt, or 11% on the year to 502 million mt, S&P Global Platts calculations based on National Bureau of Statistics data showed.

Some market sources said Chinese domestic demand was likely to decline in the second half on a yearly basis as well, but the decline could be marginal as the government has started to boost consumption and was also expected to accelerate infrastructure construction.

They said the removal of China's steel export rebates were unlikely to rein in China's steel exports in a short term, and instead could even lead to a global rise in some steel prices.

As a result, there would be a shortage of at least 20 million-30 million mt in the domestic market in the second half if China successfully maintains its 2021 annual output at the level seen in 2020, sources said.

"Steel output cuts will continue, but uncertainty remains about when [the cuts will happen] and by how much [the volumes will be reduced], which could lead to big volatility in the H2 market," a source said.

Industry to finalize output cut schedule

Due to power shortages amid the hot weather in China, 15 steel mills, most of which are electric arc furnace steelmakers, have made steel output cuts since late July, which will lead to a total crude steel output loss of around 27,000 mt/d, according to market sources. These mills are in the Guangxi, Guangdong and Sichuan provinces.

While it remains to be seen how long the power shortages will last, market sources expect normal power supply within the first half of August.

Some sources see China's overall pig iron and crude steel output in July dropping below June and year-ago levels.

But most of the sources expect construction sites and manufacturing factories to begin restocking in mid- or late August, which could again boost China's pig iron and crude steel production.

Some mill sources said they are yet to finalize schedules for steel output cuts, but reckoned the fourth quarter of 2021 could be the right time to slow down production, a decision influenced by low steel demand, and in part because of expected orders for winter steel output cuts.

China started winter steel output cuts in 2017 in a bid to reduce the winter smog over November to February.