China is strictly following capacity cuts in steel sector since past two years in its bid to deal with the problem of overcapacity and rising pollution levels. The country was able to cut its steel capacity by 115 MnT in 2016 and 2017 and closed 140 MnT of induction furnaces that use scrap metal to make steel.
Resumption of production and facilities replacement by Chinese steel firms
These aggressive production cuts continued till March as a part of pollution cutback campaign during winter heating season starting from Nov’17 to Mar’18 leading to significant increase in the Chinese steel prices (export prices surged by 15% in Q1 CY18 Y-o-Y basis) in the first quarter of 2018. The hike in steel prices also pushed profits of domestic steel mills which eventually lured some closed mills to resume production.
In Feb’18, China issued stricter rules for building new steel production capacity to replace obsolete facilities and this move underscored China’s determination to curb growth in its massive steel sector.
With resumption of production by few mills and China’s orders to replace and not shut down obsolete facilities, the industry experts have alleged that the although shutting down of surplus capacity is not hard, the challenge is in consolidating the results and preventing closed mills from resuming production with an additional concern of tough capacity swap rules not being implemented strictly.
China is encouraging companies to build more EAFs (Electric arc furnaces) in order to replace polluting blast and induction furnaces and the country is expected to add 16 MnT of EAF capacity this year with a majority of them coming up in the second half of 2018.
This EAF capacity addition coupled with production resumption and capacity replacements have increased the probability of surplus steel supply in the latter half of CY18.
Slow economic growth and tepid domestic demand
The country’s economic growth is expected to slow down to 6.5% in 2018 against 6.9% in previous year as the Chinese government ramps up efforts to cut risk in the financial system and close down polluting inefficient factories.
Tighter credit is likely to curb real estate investment and infrastructure spending in the second half of 2018 and the government’s spending on shantytown redevelopment projects has also fallen from last year resulting which country’s domestic demand may plunge in the latter half of 2018.
With the slowed economic growth and new EAFS coming, the peak season for country’s steel demand will be over post summers and the market participants will start looking for markets outside China to sell off their production in second half of 2018.
“Chinese mills are not willing to export when their domestic markets are generally better and spot supply are limited from schedule maintenance and environmental restrictions. But market fundamentals could change in the second half of this year or in 2019, as a result of higher mill utilization rates and reduced downstream demand upsetting the supply-demand balance”, said a trader based in China.
Rising Chinese steel output
China has managed to grow its steel output, even as it removes dormant obsolete capacity. As per CISA, country’s Q1 CY18’s crude steel output averaged at 2.36 MnT per day which is equivalent to the annualized output of 860 MnT/year which marks an increase of 5.4% against corresponding quarter of previous year. With increasing steel output coupled with expected EAFs addition of 16 MnT this year and tepid domestic demand, the Chinese producers will have no option but to once again burden the foreign markets with their steel produce.
As reported, a state-owned Chinese mill said that it plans to expand its flat product exports with the start-up of two new blast furnaces in the second half of the current year. Half of the mill’s 7-8 MnT per year of sales will target overseas markets with sales of SS400 grade hot-rolled coil, hot-rolled sheet and galvanized coil. An official at the mill said he expects China’s steel exports to increase this year, but it is hard to forecast because the export market will depend on the conditions on domestic markets.
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