China’s Tangshan set for year-long steelmaking curbs

China's major steel-producing city of Tangshan has announced curbs on steelmaking operations at 23 mills because of environmental violations, sending iron ore futures sharply lower but boosting hot-rolled coil (HRC) futures today.

The Tangshan restrictions, contained in a draft document released today, will apply from 20 March to 31 December and penalise mills that have failed to meet emission control targets so far this year.

"The restrictions till the end of the year are in line with the environmental emissions cut and carbon-neutrality targets. They will definitely dampen iron ore prices, while the impact on steel prices remains uncertain," a Shanghai trader said.

The most-traded May iron ore futures contract on Dalian Commodity Exchange was at 1,042 yuan/t at 5.24pm Shanghai time, down by 3.9pc from the opening price of Yn1,085.50/t.

The most-active May HRC futures contract on the Shanghai Futures Exchange edged up by 0.4pc from its opening price to Yn5,026/t at 4.44pm local time, while the most-traded rebar contract slipped by 0.1pc to Yn4,746/t.

China has pledged to peak carbon emissions by 2030 and reach carbon neutrality by 2060, adding to pressure on steel mills to meet environmental targets.

The draft lists seven mills in Tangshan that are required to lower emissions by 50pc from 20 March to 30 June, followed by 30pc cuts over 1 July to 31 December. Another 16 mills must reduce emissions by 30pc from 20 March to 31 December. Integrated mills Shougang Qian'an Steel and Shougang Jingtang Steel are exempt from the requirements.

Restrictions will be applied to sintering operations, with machines above 90m² and below 100m² prioritised for cuts. Curbs will also be applied on sintering machines below 180m², blast furnaces below 1,000m³ and converters with less than 100t of capacity.

Mills have been asked to draw up their own plans to meet the restrictions and report them to the relevant authorities today. They have also been asked to report on the implementation of measures from 20 March.

The measures will cut pig iron output and tighten HRC supply in China this year, market participants said. But views on the impact on iron ore demand were divided, with many participants expecting prices to be affected by mills' margins.

Rebar profits in China are at around Yn400/t, compared with Yn150-300/t before the lunar new year holiday in mid-February. HRC profits are higher, at Yn400-600/t, compared with around Yn240/t immediately after the holiday.

Higher ore grades to benefit "According to my calculation, the production cut will lead to about a 28mn t decrease in pig iron and 45mn t decrease in iron ore demand for this year," a Hebei mill manager said.

"We have not got the notice yet, but we have been under 30pc production restrictions already and with the new cuts we are still under 30pc curbs. The restrictions will lift steel profits by driving up steel prices and weighing on iron ore prices," a Tangshan mill manager said.

"The production cutbacks will shore up medium and high-grade iron ore fines demand due to better profits. Low-grade fines like Indian fines will see lower demand," a Tangshan trader said.

The Argus 65/62 Fe index spread average was at $24.43/dmt as of 18 March, up 50.9pc from the March 2020 average.

"The restrictions will support demand for iron ore pellets, lump and concentrate. Until now, October-December was the period of emission controls and related steelmaking restrictions in China, but the new curbs have extended that period," a Beijing-based trader said, referring to the restrictions on steelmaking operations that are typically applied from October to March, when winter weather accentuates the impact of air pollution.

HRC supply may tighten A Tangshan-based mill said it will cut steel output by 30pc until the end of December, in line with requirements in the document. "There are no winter restrictions now as we see daily restrictions," the mill manger said.

The curbs will cut Tangshan-based mills' HRC export volumes this year, and potentially total Chinese exports, as HRC supply will tighten, market participants said.

The Argus fob China HRC index averaged $649.05/t in February, up by 31pc on year.

The hit to HRC output may lead steelmakers to direct hot-metal output from rebar to HRC, although supply of the latter is expected to remain tight, another market participant said.

The production restrictions from 20 March to 30 June will cut hot metal output by 10,000 t/d from current levels, with a similar output loss in the second half of the year, according to market estimates.

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