China’s growth in steel output does not go with the country’s stated intention to lower unviable and polluting steel capacity. That was partly to overcome the global concern over its surplus steel output flooding global markets.
The overall numbers do not indicate any slowdown in its output. China remains the main reason why iron ore and steel prices are trending firm. Any sudden policy changes by its government could reverse that effect.
In the last few years, China has moved to shift the economy from heavy reliance on industrial exports to more home-grown consumer demand, with the steel sector frequently cited as ripe for consolidation because of surplus production capacity. At the same time, the pace of growth in China real estate and construction segment relies on keeping the economic engine chugging along.
Why Prices have been increasing?
China government started capacity cuts over illegal mining of ‘ditiaogang’ (unqualified steel) in Jiangsu province’s Xinyi city due to which steel exports have come down. China’s steel exports dropped to 3.5 years’ low and stood at 5.75 mnt in Feb’17 against 7.42 mnt in Jan’17. China has about 113 mnt of ditiaogang capacity (referring to the capacity of medium frequency induction furnace), which mainly produces rebar, wire rod, coiled rebar and other construction-used steel products, even angle steel and channel steel etc.
The reduced ditiaogang capacity of the mills has resulted in a decrease in steel supply in marketplaces, thereby decremented the Chinese steel exports. It was after the Chinese media raised the issue of environmental damage due to low grade steel production the local and central government has imposed a production cut on concerned mills.
Apart from demand for steel from infrastructure and construction sector in China, its auto sector, a key industry for steel demand has also seen growth leading to overall buoyancy in prices. Another reason to expect a rebound in steel prices is the bullish sentiment across base metals.
The year 2016 has been fairly good for iron ore prices and the rise sustained for the good part the Feb’17. Now, port inventories at its 13 year high have been pushing buyers to avoid any large deals in expectations of lowered price near future. Though iron ore prices are diving south, the construction activity in China is at its peak supported by government’s vision for infrastructure increase given the usual period when the home building and structural work zooms up annually.
Lackluster contrary changes in the raw material prices over the period of four weeks are by and large a small parameter to judge a trend for the rest of the year. On the other hand, production cut policy for coal industry backfired in increased coal prices from the beginning of the 2016 till the year end until the norm of working for 276 days a year was revoked to a 330 days a year to control prices of one of the important steel making ingredients.
The scenario is unlikely to witness any major change very soon as the demand is moderate to high; due development targets set ahead by Chinese government which will help continue the current pace until the favorable season for these activities last till Sep’17.
Decline in Exports
China has registered significant decline of 23% in its steel exports in the month of February. Steel exports stood at 5.75 mnt in Feb’17 against 7.42 mnt in Jan’17.On yearly basis, China’s steel exports have dropped by 29% as country exported 8.11 mnt steel in Feb’16.In first two months of 2017, China steel exports summed up to 13.17 mnt compared to 17.85 mnt in the same period last year. The higher domestic steel prices in China attracted steel makers more than exports and also the rising domestic demand. According to Chinese customs data, the steel exports in Feb’17 have plunged to 3-year low since Feb’14.
Despite the rapid rise of spot and future prices for steel in the short term and the recent recovery in output and sales performance of steel companies, companies should carry out further efforts to reduce capacity to support economic growth, as the country’s oversupplied steel sector has experienced years of plunging prices and factory shutdowns due to a sluggish economy, the media reports cited.
Analysts said despite the surge in steel prices since the beginning of this year, the supply-demand situation has not changed and the government aims to stabilize the market and prevent steel prices from overheating and disproportionately rising.
In the month of March, prices of steelmaking raw materials fell amidst low demand and futures market slowing steel prices in China, iron ore prices declined and settled at USD 84/mt on 24th March. The continuous downward trend in prices is the high inventory against minimized demand in the Chinese market and it is expected the steel prices in China will remain volatile in the coming months.