Are steel mills in China bracing for price hikes across categories in the second half (H2’21) of the calendar? A leading mill, sources hinted, is already planning such a move, which may signal other producers to take a similar approach. China follows the calendar year from January to December.
Why would mills brace for a price hike?
This is because, sources inform SteelMint, the Chinese government, in 2021, strictly does not want more than the production volume achieved in 2020, which, as per China’s Bureau of Statistics, was revised upward to 1.065 billion tonnes (bn t) (from the previously estimated 1.053 bn t).
However, the first five months of the current calendar (Jan-May’21) saw a y-o-y increase of more than 50 mn t in crude steel output.
In Jun’21 too around 99 mn t may be produced, against around 92 mn t in Jun’20.
Sources also inform that output in Jun’21, as per only CISA member companies, is at around 72.46 mn t. Although June figures have not been released, CISA members’ output in the first 10 days of Jun’21 was at 23.35 mn t and in mid-Jun, at 23.95 mn t. Output in the last 10 days of May’21 amounted to 25.15 mn t. “So, assuming the last 10 days in Jun’21 remain the same as in the last 10 days of May’21, the total could be around 72 mn t,” says the source but clarifies this only pertains to CISA members.
Therefore, there are strong indications in industry circles in China that output in H2 will shrink by more than 50 mn t so that the government is able to achieve its target for 2021.
“The production target is set for the whole year. If it gets out of control in the first half, then it will be tightened in the second half,” the source reveals.
Production in the first half spun out of control because “mills started making historical profits, driving them to produce more”.
Mills prepared
Consequently, sources inform that mills in China are prepared for the production cuts. “They would likely want to change their own policies to become more cautious in negotiating long-term prices, more prudent in price authorisation, control order quantity and mobilise resources with an eye on maximising profits against the backdrop of production cuts,” says the source.
The logic behind the impending price hike is to make up for the production cuts.
Despite a centrally controlled regime, mills in China can adjust prices by themselves but they follow the market trends in general. But, as previously seen, the government can intervene if wildly rising commodity prices severely impact downstream industries and livelihood.
Why does China want to cut production?
Environmental reasons do play a key part. But the Chinese government also wants to focus on and maintain high quality steel development. Moreover, China lacks control over overseas iron ore prices. Thus, if crude output increases without checks, there will be drain on foreign exchange.
Billets imports may surge
An important offshoot of domestic steel price hikes can be a surge in imports of billets, sources inform.
“There are strong reasons to believe that, if the economy still grows y-o-y, speculation may get injected into the system, which will boost domestic steel prices. In such a scenario, imports will become more viable and this can trigger billets imports,” said the source.
Prices as on 8:35 IST, 29th June. d-o-d changes indicated against closing price of 28th June
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