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Analysis: Surging HRC, rebar output indicates 'irrational' Chinese steel production: sources

Singapore — China's robust production of rebar and hot-rolled coil this year, despite weaker steel demand and prices, is an indication that overall output has become "irrational", market sources said.

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China's rebar and HRC output in August were 17.1% and 9.7% higher year on year, respectively, according to the National Bureau of Statistics data. Over January-August, rebar and HRC output increased 20.5% and 10.6% year on year to 164 million mt and 101 million mt, respectively.

Some steel market sources said an oversupply situation had resurfaced, not because of demand, but because of excessive output and the build-up of new capacity.

The average profit margin of Chinese domestic rebar was just 70 cents/mt in August, while for domestic HRC it was minus $20.30/mt, according to S&P Global Platts Analytics.

In the first 22 days of August, mills were selling rebar at an average loss of $3.14/mt, before prices recovered slightly later in the month. It was the first time rebar had been loss-making since January 2017.

Despite this, mills continued to ramp up overall steel production.

China's crude steel production rose by 2.4% month on month and by 9.3% year on year to 87.25 million mt in August.

Mills maintained high output levels, but shifted their focus to making steel products with more favorable margins.

One market source said a major mill in northern China had recently suspended two of its three bar mills due to thin margins, but kept crude steel and billet production at full capacity, selling the material to independent section producers.

He said China's rising steel capacity and low industry concentration had resulted in another market "rat race." The more prices weaken, the more steel mills have to produce to reduce unit costs and maximize profits in a low margin environment.

Downstream demand, particularly in the property sector, has held up fairly well this year. The downside is that China is making too much steel, market sources said.

If property sector demand slows markedly, and steel production fails to retreat due to rising capacity and loose environmental protection constraints on steel production, domestic prices could come under more pressure, making exports more attractive.

Platts estimates China's crude steel capacity will reach 1.2 billion mt/year by the end of 2019. The country's top ten mills account for around 37% of China's total output, a long way behind Beijing's target of 60% by 2020.

-- Analyst Zhang Jing, jing.zhang@spglobal.com

-- Edited by Norazlina Jumaat, norazlina.jumaat@spglobal.com