2017 REVIEW: China’s steel prices boosted by capacity cuts, healthy demand

Chinese steel prices have risen this year due to capacity cuts and strong demand from major downstream industries.

Hot-rolled coil prices in eastern China have traded in a range of 2,890-4,360 yuan ($437-659) per tonne this year compared with 1,940-4,020 yuan per tonne in 2016, according to Metal Bulletin’s price archives.

Rebar prices in eastern China rose even further this year, reflecting reduced supply caused by the country’s crackdown on substandard steel. The price range in east China was 3,070-4,980 yuan per tonne, compared with 1,830-3,530 yuan per tonne last year, according to Metal Bulletin’s price archives.

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Capacity cuts continue
China continued to target overcapacity in the steel sector this year. By the end of August, the country had already met its target of eliminating 50 million tonnes per year of crude steel capacity, according to a government media briefing released on Wednesday December 13.

This follows a capacity reduction of 65 million tpy in 2016, meaning that the country has eliminated 76.7% of its targeted 150 million tpy of capacity cuts for the 2016-2020 period.

Crackdown on substandard steel
Some 140 million tpy of steel capacity did not conform to state standards in 2017, according to the National Bureau of Statistics (NBS).

The actual cut in substandard steel production is estimated to be around 50 million tpy, market participants said.

Steel mills that have been forced to halt some production are mainly involved in the production of rebar, which is a major factor in higher rebar prices and has in turn resulted in “other steel product prices running at higher levels than last year”, a trader in eastern China said.

Winter season output cut
China’s Ministry of Environmental Protection announced a plan earlier this year to cut air pollution in the Beijing-Tianjin-Hebei region during the country’s winter season.

The plan requires mills in heavily polluted cities - including Shijiazhuang, Tangshan, Handan and Anyang - to cap steel production rates at 50% of capacity during the heating season from November 15, 2017, to March 15, 2018.

Some other cities surrounding Beijing have also mandated production cuts at local steel mills by different percentages to ensure good air quality.

“Unlike the nationwide overcapacity cut program, the action was unexpected and has led to the surge in steel prices since November,” a Shanghai-based trader said.

Construction and automobile demand
Investment in real estate development was 10.04 trillion yuan in January-November 2017, up 7.5% year on year, according to the NBS.

Despite some fluctuations for seasonal or regulatory reasons, domestic demand for steel used in construction - including rebar and some HRC - trended higher in 2017.

Healthy growth in the domestic automobile industry also boosted demand for HRC and some other forms of flat-rolled steel.

While China’s Ministry of Finance raised the tax on the purchase of vehicles with engine sizes of 1.6 liters and less to 7.5% in 2017 from 5% in 2016, domestic automobile production continued to grow in 2017.

China produced 26 million automobiles during the first 11 months of the year, up 3.9% from the corresponding period last year, according to the China Association of Automobile Manufacturers (CAAM).

Export drop
After some weakness at the start of the year, Chinese export prices have undergone two rounds of increases, mainly due to the policy-led reduction in domestic supply.

Chinese HRC export prices have traded in a range of $415-600 per tonne fob thus far this year, up from $270-520 per tonne fob in 2016; and rebar export prices have traded in a range of $410-580 per tonne fob, up from $255-460 per tonne in the same comparison, according to Metal Bulletin’s price archives.

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But high prices in 2017 have weighed on buying interest. China exported 69.83 million tonnes of finished steel in the first 11 months of this year, down 31% from a year earlier.

“China’s steel production cuts during the current heating season are creating expectations of tighter domestic supply, thereby reducing volumes available for export, which has led to sparse trading in China’s export market for more than a month,” a Beijing-based export trader said.

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