December 04, 2021 (MLN): China will keep tight control of steel production ahead of the Winter Olympics in February 2022 amid ongoing power shortage over the winter heating season, CreditSights said in its outlook for the country’s steel sector.
“Looking forward, we expect the favorable supply and demand dynamics to continue into 1Q22 as we believe the Chinese government will keep tight control of steel production due to the pollution controls ahead of the Winter Olympics and the improving but still ongoing power shortage,” the report said.
It said that over 50% of blast oxygen furnaces in the Tangshan region remain shut. Tangshan is a major steel production base in the Beijing-Tianjin-Hebei Capital region with >20% of China’s steel output. Even small steel mills, which tend to rapidly increase output during price upcycles have not managed to ramp up production owing to the strong enforcement of production curbs by the local governments.
China’s monthly crude steel production was down 23% YoY in October and the capacity utilization rate of China’s steel mills dropped to a record low in November.
Limited steel supply provides Chinese steel companies with some pricing power. Therefore, steel prices have dropped less than raw material costs (iron ore, met, and thermal coal) since October 19, 2021, when the Chinese government started to intervene in the onshore commodities market in a bid to rein in elevated coal prices amid the nationwide energy shortage.
Production curbs also put significant downward pressure on iron ore prices. CreditSights expect coking coal prices to remain capped by the administrative measures carried out by the Chinese government, at least over the winter heating season, which will last until March 2022.
Meanwhile, China’s steel demand, which has been dragged down by weak property and infrastructure investment in the past few months is now bottoming out, it added. Property and infrastructure investment account for around 40% and 30% of total steel demand in China, respectively; while the rest is from auto production, shipbuilding and home appliance manufacturing.
It said that China’s steel industry will continue to consolidate, accelerated by its carbon reduction ambitions while adding that consolidation will help control output, support steel prices and margins, and is credit positive for the large Chinese steel companies.
The report further added that the supply and demand dynamics will continue to support steel margins in China despite the recent pullback in steel prices.
Overall, over the next 6 to 12 months, CreditSights said it expects steel margins in China to remain supported by the ongoing production curbs, limited upward pressure on iron ore and coking coal prices, continued industry consolidation, and bottoming steel demand.
Copyright Mettis Link News