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Analysis: China steel outlook hazy as iron ore, steel prices fall

Chinese steel output and demand is likely to weaken in the short term, pressing on seaborne iron ore and met coal prices, after China's steel output surged to new records earlier this year, market participants said.

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Related blog post: Chinese steelmaking cuts hammer market

But the extent of any slowdown may be harder to judge, given partly conflicting industry data, forecasts and trends.

Iron ore reference IODEX 62% Fe prices have lost $14, or over 18% since September 13, closing at $62.25/dry mt CFR China on Monday. On Tuesday, IODEX rebounded to $64.60/dmt CFR China.

Rebar prices in Beijing have fallen this month since a peak in early August.

China mill iron ore restocking efforts have weakened, while arbitrage indicators show a lack of incentive to buy seaborne iron ore against domestic prices, analysts at Marex Spectron said Tuesday.

China's crude steel output between January and August of this year was up 5.3% on the same period of 2016, or by around 28 million mt, based on World Steel Association data.



On the face of it, this high growth rate may mask the impact of undocumented output reined in this year now surfacing in the official steel data.

Greater scrap usage may be lessening pig iron consumption in the industry. China's pig iron output in January-August was up 3.6% on the period in 2016, implying potential for great scrap consumption to bridge the higher implied consumption rate in crude steel.

Factoring in a certain amount of shuttered induction furnace steel capacity for this year -- given a broader target of 120 million mt/year to be shut by June 2017 -- actual crude steel growth rates may be much more subdued.


INDUCTION SHUTDOWN


The shutdown of induction furnace capacity in China had two market factors.

Firstly, steel output from undocumented illegal small producers was eradicated, leaving output to be recorded at mills captured in the Worldsteel data, via China Iron & Steel Association (CISA) members.

The other factor was ferrous scrap used as the main feedstock by the induction furnaces had to find new outlets, partly increasing ratios of scrap use at some other mills.

In 2016, monthly crude steel output accelerated in the September-December period by 0.48% on average rates seen earlier that year. So for 2017, the trend looks like it is expected to go down against last year's higher Q4 output, as Beijing cracks down more on pollution and cooling its economy.

Government-mandated plans to halve blast furnace production at some mills in northern China during winter, and a slowdown in the to-date strong property and infrastructure sectors for steel demand are now seen as cutting usage of steel raw materials.

In August, these factors had been supportive to the steel and raw materials market, with a rush to increase productivity at mills and capture steel orders and high cash margins ahead of any curbs.

But now, the onus is on reduced steel raw materials demand as the market slows.

Worldsteel in April revised up its Chinese steel demand outlook, to unchanged this year, from October 2016's expectation of a 2% contraction in 2017 steel demand in the world's biggest market for the commodity.

Factoring in the anomaly this year of more induction furnaces shutting down, and assuming operating rates of capacity and the contribution closed this year, steel output is still likely to grow. Even a monthly cut in China's crude steel output of 5% for the reminder of the year would likely leave growth on last year, while steelmaking with iron ore and coke has become even more dominant as induction furnaces have closed.


EXPORTS FALL


As China's steel export rates have fallen, greater consumption internally is also pushing up China's demand.

The latest comments from CISA and industry executives in China may serve as a check on the iron ore and steel market's about-turn in attitude, from bullish to bearish.

One north China executive said China's domestic steel prices are unlikely to slump for the last few months of 2017 given that pollution control measures will most probably see steel output curbed, which implies margins remaining at historically high levels.

Demand for steel may decline, while demand from new auto output, China's shift toward renewable and cleaner sources of energy, and the Belt and Road Initiative for trade infrastructure in China and beyond may benefit steelmakers over the coming months, sources in China said.

CISA Vice Chairman Li Xinchuang, who is president of the China Metallurgical Industry Planning and Research Institute, highlighted efforts already to shut steel capacity, while steel demand was strong, particularly in construction, speaking at the IREPAS meeting in Athens Monday.

CISA data shows steel output in early September rebounding on August rates.

An upturn in Chinese steel demand and output for this year on earlier industry forecasts seems inevitable.

As markets look forward, implying the scale of output cuts and future health in steel consumption rates in China, along with NDRC policies to stoke economic growth and upcoming National Congress in October, may shape the degree of readjustment in steel related trade and pricing.

--Hector Forster, hector.forster@spglobal.com
--Edited by James Leech, james.leech@spglobal.com