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China's steel production in recovery mode in Oct as power rationing eases

Highlights

Mills in east, south China resuming production

Output rebound modest through mid-October

Prices remain on downtrend on sluggish steel demand

China's curbs on power supply for industrial use that impacted the steel sector in late September were easing in some places in October, enabling steel mills to gradually resume output since the start of the month, mill sources and traders have told S&P Global Platts.

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Eighteen provinces and regions enforced power rationing in the second half of September due to a shortage of thermal coal-generated electricity supply and tightening energy consumption targets, impacting both steel production and demand.

Daily pig iron production fell 6% to 2.112 million mt/day over Sept. 21-30 from the previous 10-day period over Sept. 11-20, while crude steel output fell 11% over the same period to 2.346 million mt/day, China Iron & Steel Association data showed.

As a result, China's daily pig iron output in September fell 4% month on month to 2.206 million mt/day and was down 13% year on year, while crude steel output fell 6% on the month to 2.515 million mt/day and was down 18% on the year, according to CISA.

Power rationing in H2 September mostly affected long steel mills, while flat steel producers faced only about 20% of total output loss in the impacted regions, Platts reported earlier.

However downstream, it was flat steel that saw the biggest impact as the power curbs significantly impacted the manufacturing sector, a major consumer of flat steel.

As a result, domestic rebar prices rose 13% to Yuan 5,915/mt ($916/mt) Sept. 30 from the start of September, while hot rolled coil prices rose 2% over the same period to Yuan 5,770/mt, according to Platts data.

Output rebounding

October has ushered in a more positive outlook for China's steel industry, with the power crunch easing slightly in some areas and the steel output cuts in H2 September putting most regions back on track to meet 2021 energy consumption targets.

Steel mills, particularly those in Jiangsu, Guangdong and Guangxi, have gradually resumed production since the start of the month.

Mills in Jiangsu province had ramped up crude steel production by at least 25,000 mt/day as of Oct. 13 from the end of September, Platts calculations based on data from mills and traders showed.

Some mills in Guangdong and Guangxi provinces are also on the path to production recovery. These mills, most of which are electric arc furnace steelmakers, saw 40,000 mt/day of capacity suspended in H2 September.

However, sources in these regions said most steelmakers were not expected to push their steel production to full capacity as they still need to implement output cuts to some extent to ensure their 2021 crude steel output remains near 2020 levels.

China has been asking steel mills to curtail production since July to keep their 2021 annual output below 2020 levels. The move is also seen in line with China's overall carbon emissions reduction goals.

One mill source in east China said his company has planned to trim steel production by around 100,000 mt over October-November in order to keep 2021 production on par with 2020, which will partly offset the production rebound in Jiangsu.

Prices under pressure

The modest rebound in steel production through mid-October has failed to lift steel prices, which have remained on a downtrend since the start of the month, mostly due to sluggish demand, market participants said.

Domestic rebar and hot rolled coil prices both fell 2% from Oct. 8 to Yuan 5,875/mt and Yuan 5,740/mt, respectively, Oct. 12.

Some traders in Beijing, Shanghai and Guangzhou said construction steel demand in September and October turned out to be weaker than a year earlier, and any further improvement in demand in Q4 was expected to be limited by a slowdown in the property sector.

China has tightened credit to the property sector since late 2020 in a move aimed at deleveraging the sector, which led to a 3.2% year-on-year decline in property new home starts over January-August.

Some flat steel traders said demand from the manufacturing sector had been battered since September by both the power rationing and soaring commodity prices and steel production could remain lower than a year ago throughout Q4, while the outlook for steel demand was similar.

However, while steel output cuts in northern China will continue until March 15 next year under a "winter output cuts" program aimed at reducing winter smog, mills in other parts of the country are expected to return to normal production levels in December or January once their output cut requirements for 2021 have been met, sources said.