A fall in China's crude steel output last month may be a harbinger for the coming winter as the country prepares to cut output to reduce pollution, impacting iron ore markets, investment bank Commerzbank said Friday.
Chinese steel production fell 3.7% on the month in September to a seven-month low of 71.83 million mt, while on a daily basis it was 0.5% lower, Commerzbank said in a note, citing latest National Bureau of Statistics data.
"The lower level of production is due to the fact that cuts during the winter months have been ordered by the authorities and in some cases brought forward," Commerzbank said. "If production were to fall further in the next few months, this would doubtless have a negative impact on iron ore and zinc demand."
Steel production in September was the lowest since February's total.
For September's daily rates to drop to February's rate would require a further decline of around 8.5%, based on S&P Global Platts calculations using industry data.
Areas around Beijing may have fast-tracked idling at mills and associated processing plants as the communist party gathered this week to discuss long-term policy.
Greater emphasis on pollution control at the National Congress may lead to tougher measures around metallurgical industries over the winter and going forward, sources said.
"The party congress that began in Beijing on Wednesday is also likely to have played its part. This is because steel production in the regions surrounding the Chinese capital had to be scaled back in advance in a bid to improve air quality in Beijing during the congress," Commerzbank added.
As pressure grows on steel raw materials' spot prices, China indicative steel mill margins remain strong, close to multi-year highs.
In September, steel spreads in China hit the highest since at least 2010. Raw materials costs fell to boost margins, while steel prices led August's strong gains in the steel spreads.
On Thursday, China's HRC export spreads rose to $339.58/mt, up from October 13's $334.48/mt. The highest for HRC spreads this year was on September 15 at $356.48/mt.
The Platts China rebar export price spread reached $309.58/mt Thursday, down from $315.48 on October 13. Rebar prices came under more pressure from an expected slowdown in construction demand.
The Platts 62% Fe reference IODEX assessment fell $2.55 to $59.45/dry mt CFR China, the lowest since June 23.
The spread between steel prices and imports of iron ore with coking coal helps determine indicative operating conditions of steel mills, and raw materials demand. Chinese steel prices are supported by the expected cuts to production.
High steel spreads may encourage restocking of raw materials to secure input and boost productivity against the underlying margins on offer.
But steel and iron ore processing and coke making cuts that are expected to gather pace from November through the winter in various areas of China to cut air pollution are reducing demand for raw materials.
--Hector Forster, email@example.com
--Edited by Jeremy Lovell, firstname.lastname@example.org