CHINA STEEL SPOTLIGHT: Domestic prices spike on Tangshan production cuts

Domestic steel prices in China are picking up strength after news of summer production cuts in the country’s steelmaking hub of Tangshan broke.

The price increases came after several mills confirmed that they had received official notices from the Chinese government. Prices rose steadily from the afternoon of Wednesday July 11 after a couple of days of uncertainty over whether the cuts would materialize.

The official notices require steelmakers to restrict production from July 10 to August 31 to curb air pollution.

The most-traded October rebar contract on the Shanghai Futures Exchange rose 1.67% to 3,944 yuan ($591) per tonne during the night trading session on Wednesday, while the benchmark hot-rolled coil contract gained 1.54% to 4,013 yuan per tonne.

On Thursday morning, rebar prices in east China rose 50-60 yuan per tonne to 4,060-4,100 yuan per tonne. Hot-rolled coil prices in east China increased 20-30 yuan per tonne to 4,260-4,270 yuan per tonne.

Concerns over supply have emerged in the Chinese steel market, sources said.

“Most traders believe that several mills have really started to reduce production, or are going to do so,” a Tangshan-based trader said.

The trader said mills in the region such as Tangshan Ganglu Iron & Steel and Yanshan Iron & Steel have confirmed that they have received the government notices, and that they have started to limit production for several steel products in case a shortage of raw materials emerges following the restrictions.

The documents did not specify how much capacity will be cut, but said companies in industries such as steel, coking and cement plants should restrict production till August 31 to reduce the emission of pollutants such as sulfur dioxide, nitrogen dioxide and carbon monoxide.

Districts in Tangshan are being instructed to lower the density of such pollutants by 10-40% in the second half of this year, compared with the first half.

The move will mainly affect sintering and the production of coke, the processes of which results in such emissions. This could reduce the production of iron and steel, with an estimated 130,000-160,000 tonnes of hot metal to be reduced every day once the restrictions take effect, the source in Tangshan said.

Steel prices are expected to rise further, “especially in the short term,” Wang Guoqing, Lange Steel Information Research Center’s research director, said.

This is unlike the price drops seen in other commodity markets, especially after the United States unveiled plans to impose tariffs on an additional $200 billion worth of Chinese goods.

While prices for copper and zinc on the London Metal Exchange tumbled to almost their lowest in a year, and those for crude oil and chemicals had also declined in China’s domestic market, “steel prices have remained robust, driven mainly by domestic pollution-control policies,” Wang said.

But a segment of the market does not expect significant growth in the longer term for steel prices because downstream demand remains low.

Sellers of Chinese steel products have been more willing to export over the past two weeks, not just because of the depreciation of the yuan against the US dollar, “but also because they receive fewer domestic orders these days,” a Beijing-based trader said.

Profit margins for domestic downstream buyers in China have also thinned due to surging prices for raw materials over the past two years, which forces them to place orders for steel only when necessary, he added.

Other market participants believe that Tangshan’s production cuts will not affect the market as greatly as other measures such as the central government’s supply-side reforms and crackdown on substandard steel production. This is because Tangshan’s main focus is on cutting air pollution rather than steel output.

A trader in Malaysia agreed, saying it was confident that China’s steel prices would not surge in the long term.

“China’s output restriction is not news to global traders,” he said. “We were jittery the first time we heard about that, but later we saw the price fluctuations were in a narrow range.”

While he agrees that the drop in output will likely trigger some price growth, he does not think Chinese mills will keep raising prices to overseas buyers given that domestic demand remains weak.

An export trader in east China concurred, saying: “Overseas buyers will import from alternative suppliers if China’s prices increase sharply, like they did in the first half of the year.”

Metal Bulletin’s fob China Rebar Index rose $2.75 per tonne to $554 per tonne on Wednesday while the fob China HRC index gained $2.78 per tonne to $580 per tonne.

Steelmakers outside of China are offering their products at competitive prices, which will likely limit any uptick in the international market.

Export prices for hot-rolled coil from the Commonwealth of Independent States were at $560-575 per tonne fob Black Sea on Monday, lower than China’s prices.

Qatari rebar was offered at $555 per tonne cfr to Hong Kong, around $10 per tonne lower than export prices for the Chinese long product.

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