China air quality targets could support steel prices

China's steel prices could find support this winter as authorities in the north of the country implement tougher output restrictions to meet air quality targets, leading some buyers to pick a price bottom this week.

Shanghai traders began adding to warehouse positions for the first time this winter, eating into mill inventories. Seaborne buyers also rushed to close deals this week for shipments in January-February, when markets will be better supported ahead of China's peak construction demand season.

Shanghai rebar ex-warehouse prices jumped early this week and finished today up by Yn70/t on the week, while Shanghai hot-rolled coil (HRC) prices rose by Yn130/t. Tangshan billet rose by Yn230/t to Yn3,310/t ex-works. A north China mill sold out its February HRC export allotment as buyers rushed to close orders.

Tougher output restrictions have flipped the outlook to positive. Chinese traders also begin stocking up in December with trader-held inventories typically peaking in late February and early March, before spring construction demand emerges.

"We have noticed some steel mills selling their contracted iron ore volumes, and it may signal that they are going to reduce output. My data model suggests it is about time we start buying iron ore and steel as the market seems to have bottomed out," a Singapore-based trader said.

Beijing did not require local authorities to set blanket output cuts, as it did last year. It is allowing for more flexible plans this winter to take into account pollution controls implemented by mills. But mills are not meeting the ultra-low emission standards required under the tiered system allowing for higher levels of output, leading to repeated air quality warnings this winter. Tangshan is under pressure to improve its worst ranking for air quality and officials met with mills this week to question their efforts.

Tangshan published a notice today urging mills to complete pollution control upgrades for inspections or risk shutdowns at sintering and pelletising plants that contribute to smog.

"We believe there is a growing likelihood that China will intensify winter production cuts in the next few months in order to achieve PM2.5 reduction targets," US bank Morgan Stanley said in a note yesterday. Last winter, China reduced its PM2.5 particulate matter emissions by 25pc, but a third of that reduction was aided by strong winds. Expected El Nino conditions could mean less windy weather this winter, leaving smog to linger. Without the natural clearing, north China will need more output cuts to meet air quality targets, it said.

The Beijing-Tianjin-Hebei, Yangtze River Delta and Fenwei regions set PM2.5 reduction targets at 3-4pc after a public feedback, less stringent than the initially proposed 5-6pc cuts. Northern localities are more vulnerable to a windless winter and are already behind on achieving cuts. Tangshan saw PM2.5 levels jump by 45pc on the year in November. The city is supposed to cut its PM2.5 by 4pc this winter.

"The market is surprised that despite the air pollution warning in Tangshan in early November, Tangshan has so far not initiated any winter production cuts. We believe it is a matter of time until Tangshan initiates production cuts, because winter PM2.5 is calculated on a six-month basis," the bank said. Tangshan's October PM2.5 fell by 23pc on the year.