China steel prices to fall on inadequate winter output cuts: Wood Mac

China’s pollution cuts will cause steel demand to be cut by 9.6 million mt in the fourth quarter, depressing steel prices, Wood Mackenzie said.

Wood Mac expects the cut in steel demand will not be adequately offset by pollution-related curbs on steel production in two major and 26 lesser cities in China’s northeast, Senior Consulting Manager Ming He said in a note.

“This will put downward pressures on the steel price during the winter,” Wood Mac said. “We estimate steel demand will be hit even harder than steel supply. This is because construction has been stopped in Beijing, Tianjin and Hebei province. Some downstream sectors will be also severely restricted.” A strong steel price and forward mill margin indications have been supportive for raw materials prices. A fall in Chinese steel markets may remove a layer of price support for iron ore, global supply of which has expanded over the past few years, with further expansion expected in 2018, based on company plans.

Beijing’s policy may cause pig iron supply to be cut by 14.2 million mt in Q4 2017, and 20.2 million mt in Q1 2018, Wood Mac said.

More use of scrap to cut pig iron ratios in crude steel, and rising hot metal and steel production outside the northeast region to meet the shortfall, may help offset winter adjustments in pig iron output at affected blast furnaces, Wood Mac said.

“The loss will be partly offset by production hikes from capacity outside the 2+26 region — two thirds of hot metal capacity sits outside the restricted region.”

“To make up for the loss in hot metal, steel companies can feed more scrap or ramp up electric-arc furnaces, which will further offset the loss on the steel supply. The actual steel curtailment will be about 4 million mt in Q4 2017.”

Wood Mac said stricter measures on pollution-related cuts are being implemented at a more local level, and some areas will implement tougher or longer-lasting restrictions than outlined by the 2+26 policy.

China may reduce steel production by about 33 million mt between mid-November and the end of March 2018, based on S&P Global Platts estimates published October 27.

Falling imported iron ore prices into China had principally aided steel margins in China since a peak in HRC margins marked in September, based on Platts China steel and iron ore, coking coal import price assessments.

Greater divergence between higher steel prices — aided by stocking in advance of the Chinese pollution cuts and supportive pricing and balances in many regional markets outside China — with lower raw materials prices on an expansion, or recovery in supply rates, has developed, largely in Australia.

Source: Platts