On July 20, Tangshan, the steelmaking hub in northern China’s Hebei province, turned up the heat on pollutant industries by imposing a 43-day output cut on local blast furnaces. In parallel, Chinese authorities are removing a further 30 million mt/year of crude steel capacity.
When compared with the winter heating season of November 2017 to March 2018, the iteration proposed for 2018 is set to affect a greater land-area.
China imposed production cuts on blast furnaces and sinter plants across “2+26” steel-producing cities in 2017. A total of 51.8 million mt/year of pig iron capacity was reduced during that period, according to S&P Global Platts calculations.
This year’s program is expected to effect “2+42” cities.
2018/2019 winter cut: what to expect
While China has not officially announced details of the 2018-2019 winter heating season cuts, the state council released its “three-year blue skies” plan on July 3. Under this decree, areas for winter air pollution controls will be expanded from Beijing-Tianjin-Hebei to the Fen-Wei plain and the Yangtze River delta.
Platts calculates that an extra 40 million mt/year of pig iron capacity would be subject to the 120 days winter output cuts in 2018-2019, assuming the same utilization rate of 50%-70% as experienced last winter.
It is also widely expected that the production curbs this coming winter will likely be differentiated based on the emission level at each steel mill. Managers at large state-owned steel mill in Tangshan said they expected differentiated measures mill-by-mill because this will give companies more incentive to improve their emissions levels.
“The government has set up the 2018 decapacity target (of 30 million mt/year) and this applies to the winter heating season. Therefore, the remainder of the task for each mill will be different. I think the government will execute the strategy with more flexibility this time,” they said.
The Fen-Wei plain, and the Jiangsu and Anhui provinces are “highly likely to be included into the list this time as well,” a purchasing manager at a large private steel mill in the Hebei province commented. “The curbs on blast furnace output in the Tangshan region could be matched to that of sintering, in a range of 30%-50% across all steel mills in the region.”
Blue sky and the rise of scrap
The cuts imposed during the 2017/2018 winter heating season illustrated that achieving fresher air does not necessarily result in lower crude steel output.
Instead, the national data shows an increase to 344 million mt of crude steel produced during the 2017-2018 winter period, 3% higher than the same year-earlier period, when no restrictions were imposed.
Furthermore, January-June output of 449 million mt is 7% higher than H1 2017, and also the highest year-to-date output on record. S&P Global Market Intelligence expects China to produce a new record of approximately 873 million mt of crude steel in 2018.
Higher-than-expected steel output has been driven largely by robust domestic demand and by the resultant strong steel mill margins. Mill profitability over the winter period averaged $140/mt for rebar and $130/mt for hot-rolled coil, according to Platts data. Steelmakers responded to the strong economic incentive by lifting the ratio of scrap usage, which was in abundance in China due to the closure of induction furnace production. National Bureau of Statistics data shows that pig iron output in H1 2018 was little changed at 370 million mt, up 2% year on year. This compares with stronger growth of 7% in crude steel production.
What do these cuts mean for seaborne prices?
Market Intelligence expects 62% Fe seaborne prices of iron ore to experience some seasonal uplift in Q3 2018, and for prices to average $69.0/mt CFR China in 2018. These winter suspensions to Chinese steelmaking facilities will increase the amplitude and duration of volatility in seaborne prices as market participants struggle to clarify the impact on demand.
Over-capacity remains a global issue although the shuttering of pollutant Chinese capacity and elevated utilisation rates of existing steel capacity in China will improve the situation. We expect world utilization rates to improve from a recent low of 67.8% in 2016 to 70.5% in 2018.
Market Intelligence expect 62% Fe prices to average $65.7/mt in Q4 2018, albeit with prominent volatility and with continued environmental pressures to enact stronger downward forces on 58% iron prices.
Premiums on direct charge material are expected to remain at elevated levels. The 58% to 62% iron differential has remained broadly constant since Q4 2017 at approximately $28.8/mt on October 17.
This article is a collaborative analysis by S&P Global Platts’ Jeffery Lu and S&P Global Market Intelligence’s Max Court. Both companies are owned by S&P Global Inc.
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