Steel output cuts halt price declines in China

Negative margins have forced Chinese steelmakers to cut output by more than 1mn t in August, sending domestic prices higher today.

More than 30 mills in Shandong, Shaanxi, Shanxi, Gansu, Sichuan and Fujian have announced maintenance shutdowns that will cut production by at least 1.15mn t of output in August, equivalent to less than 2pc of China's monthly run-rate.

Electric-arc furnaces (EAFs) account for most of the production cuts. EAF margins have been squeezed by higher ferrous scrap prices, which have risen partly because of stronger consumption of scrap by blast furnace-based mills that have increased their use of the product to counter higher iron ore prices. Negative margins are a factor in the mill shutdowns, traders said.

The August maintenance cuts come after aggressive pollution controls in north China in June-August failed to prevent the country's steel production from rising to new record levels.

Crude steel output at China's largest mills over 11-20 July averaged 2.0176mn t/d, down by 2.3pc from 11-20 June but up by 3.1pc from 1.9563mn t/d a year earlier, according to China iron and steel association (Cisa) data. Output fell from a peak of more than 2.06mn t/d in mid-June, but Tangshan then eased its restrictions in the second half of July to allow modest output gains.

Cisa data, which include output from more than 100 of the country's largest steel mills, show output gains of around 3-5pc this year compared with national bureau of statistics data that puts growth at 9.9pc for January-June.

The latest round of maintenance cuts will not be enough to reverse China's output growth in August, based on either set of numbers. But the cuts have been enough to reverse sentiment. Hot-rolled coil (HRC) offers in Shanghai rose by 60 yuan/t ($8.50/t) to Yn3,720/t ex-warehouse in the morning today, but fell by Yn20/t to Yn3,700/t in the afternoon as trade slowed down.

Shanghai rebar prices finished the day up by Yn20/t at Yn3,640/t ex-warehouse, off highs of Yn3,660-3,670/t in the morning.

The afternoon price declines could indicate there will be limited momentum from the output cuts. Price direction for steel is also tied to cost trends for raw materials. Steep declines in iron ore prices over the past two weeks have created margin room for steel prices to fall, so any further declines in iron ore prices could drag steel prices down further, or create support if iron ore finds a near-term bottom.

Scrap prices have followed both steel and iron ore lower. China's largest private-sector steel producer Jiangsu Shagang has reduced its heavy melt scrap purchase price by Yn160/t in four price cuts over the past week, with the latest decrease of Yn50/t effective today putting the price at Yn2,650/t ex-works for heavy melt No. 3 grade delivered to its mill in Zhangjiagang, north of Shanghai.

Steel prices may find support from the seasonal uptick in construction demand in September-October, as well as any pollution restrictions during national celebrations in October that would further pinch supply.

Cisa mills' 10-day average steel output mn t/d