Sentiment for the coming six months has turned increasingly bearish since the guidelines, coupled with winter production restrictions, were announced in September.
 
New guidance on 'Two-High' projects
The “Two-High” policy is a key driver of China's decarbonization strategy, especially with the National Development & Reform Commission (NDRC) confirming on September 16 its guidance for energy consumption based on gross domestic product per person (GDP per capita) and China's total consumption policy to 2035.

Nine provinces failed to meet energy consumption reduction targets in the first half of 2021 - Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Xinjiang, Yunnan, Shaanxi and Jiangsu - the NDRC said.

As a result, new construction projects in these provinces, which have high pollution levels or consume a lot of energy - including steel projects - have stopped applying for construction permits, while others already taking place face strict inspections and curbs on production, it added.
 
Market sources said that major steel mills with blast furnaces or electric-arc furnaces - especially in Jiangsu, Zhejiang, Guangxi and Yunnan - were heard to have shut down or stopped steel production. Local governments have also limited electricity consumption this month.

“Most steel mills cut steel production in September significantly because they very often received verbal notices [and on-site] inspections and saw the backlash at other mills and in areas that had exceeded steel output,” a Jiangsu-based mill source said. 

Extended winter policies in north China
Over the past three years, winter production cuts have typically been carried out across 39 cities in northern China from mid-November to mid-March. However, 2021 has seen other event-led cuts in addition to the typical winter production cuts.

For example, China has asked steel mills in the key steelmaking belt of Beijing-Tianjin-Hebei and nearby regions to curb or stagger production in two phases between November 15, 2021 and March 15, 2022, in preparation for the Beijing Winter Olympics which take place in February 2022.

China’s Ministry of Ecology & Environment has also prolonged the usual period of winter steel production cuts, which will now start earlier than usual on October 1 and will finish later than normal, only coming to an end on March 31, 2022. It has also expanded the number of cities and districts that are affected by the cuts, according to a draft notice issued on September 16. 
 
Bearish iron ore demand
The strict “Two High” regulations show that China is determined to keep crude steel output in line with 2020's, sources said.

China produced about 733.02 million tonnes of crude steel in January to August this year, up by 5.3% compared with 2020, according to data from National Bureau of Statistics (NBS).

Overall market sentiment for iron ore prices weakened in September and the bearish outlook is expected to continue for the rest of 2021 and into the first quarter of 2022, sources told Fastmarkets.

“The key driver for iron ore demand is the hot metal restrictions, [and while] iron ore supplies may also be affected by the annual typhoon season in Australia and the rainy season in Brazil, overall demand seems weaker than supply,” a trader source from Xiamen said.

“Some steel mills have resold long-term contract iron ore cargoes with October and November-laycan and procured low-grade materials at Chinese ports at lower costs, rather than using more high-grade materials to increase production efficiency,” a mill source from north China said.

Some sources estimate iron ore prices to continue on a downward trend.

“The 62%Fe price could stabilize between $80-90 per tonne cfr Qingdao in the rest of 2021 after prices dropped below $100 per tonne on September 20,” a Qingdao-based trader source said.

Fastmarkets’ index for iron ore 62% Fe fines, cfr Qingdao was at $93.03 per tonne on Tuesday September 21, up by $0.05 per tonne day on day and the up-to-date monthly average was $123.33 per tonne, down by $36.33 from August’s average.

“Now, production curbing is the key factor and once it’s removed, iron ore prices may increase sharply. But in the short term, we may consider taking cargoes at about $85 per tonne,” a trader source from Shanghai said.