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China's iron, steel markets brace for 'new normal' of production controls in Tangshan

China's iron ore market was bracing for pollution curbs on steelmakers in Tangshan to become the new normal after local authorities announced plans to impose production controls on 23 steelmakers from March 20 to Dec. 31 in a bid to lower emissions by 30%-50%.

Tangshan's local government on March 19 issued a notice requiring seven steelmakers in Tangshan to lower production to achieve a 50% reduction in emissions over March 20-June 30 and a 30% reduction over July 1-Dec. 31. Another 16 steel mills were required to cut emissions by 30% from March 20 to Dec. 31 in the notice seen by S&P Global Platts, and confirmed to have been received by three mills.

With China adopting a strong stance on emission controls and imposing steel output reductions, iron ore demand is expected to soften in coming months, market sources said.

"The demand impact on raw materials, especially on iron ore, is apparent with lower steel output in the largest steelmaking city in China," a trader source in China said.

Total iron ore inventory at five major ports in China rose to 129 million mt March 7, the highest level since May 2019, CEIC data showed, amid steel production cuts in northern regions since February.

The most actively traded iron ore contract on the Dalian Commodity Exchange for May delivery closed at Yuan 1,042/mt March 19, down 3.4% from the previous settlement, DCE data showed.

However, other market sources in China were more optimistic about iron ore prices in the medium term amid firmer steel prices and margins.

Spot trading activity in China for domestic billet was heard stronger in the day on expectations of lower steel production over March-December, a trader in northern China said.

"If supply of billet reduces, prices of semi-products and steel would be relatively firmer," another trader in northern China, adding: "Production controls are becoming common under government measures, so market sentiment for steel is not notably impacted."

High-low grade divide to widen

Market sources also expect the price spreads between the different grades of iron ore fines to widen as steelmakers become more conscious of quality requirements amid environmental concerns.

Higher grade fines and direct feed materials would most likely see benefit from the curbs, market sources said.

"The curbs would prop up steel margins, driving mills to maximize output under the operational constraints. Mills would want to shift iron ore blending ratios toward higher-grade materials and direct feed such as lump and pellet," a market source said.

"Good steel margins would invalidate a lot of low grade fines," another source said, adding: "That supply would get thrown out of the equation and therefore effective supply becomes tight again."

Source: S&P Platts

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