Why China’s new 2024 steel output cut policy is altering value chain dynamics

China’s National Development and Reform Commission (NDRC) will work with relevant parties to regulate crude steel production, with a focus on energy saving and reducing carbon emissions. It will also release guidance on crude steel output for different steel mills later this year after a national investigation on steel capacity

This new announcement is within market expectations regarding China’s annual crude steel production curbing. But the uncertain depth of this regulation and its broad impacts on the steel and raw materials industry brought mixed sentiments to the market, with some waiting for more specific regulations for the rest of 2024, sources told Fastmarkets.

Crude steel output adjustment to align with decarbonization and steel demand

In 2021 and 2022, the Chinese government required a year-on-year decrease in annual crude steel output to follow the country’s carbon peak and carbon neutrality goals.

But the official notice on April 3 focused on crude steel output adjustment for different steel mills to tackle the problem of low steel prices and demand, rather than directly reducing total volume, sources told Fastmarkets.

“The notice is a telling sign that the government aims to have detailed knowledge of the country’s steel capacity due to concerns on downstream steel demand and prepare to avoid any worse situation for steel mills in the rest of 2024,” a Xiamen-based trader said.

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China’s crude steel output decreased by 2.8% year on year to 1.035 billion tonnes in 2021 and by 1.64% year on year to 1.018 billion tonnes in 2022. In 2023, crude steel output was flat compared with 2022 volumes, according to data from the country’s National Bureau of Statistics (NBS).

The government will continue to focus on energy saving and reducing carbon emissions during the crude steel output adjustment to align with the country’s decarbonization targets.

The notice also proposed the new idea by supporting high-quality steelmaking companies and further cracking down on inefficient and illegal steelmaking capacities to adjust the annual crude steel output.

A few market sources said the NDRC announced detailed investigation of steelmaking facilities across the country, which might help create specific measures to cut production by shutting down specific facilities.

Shortly before the official notice, China’s Iron and Steel Association called on steel mills to reduce steel production to build a healthy fundamental supply and demand structure on March 28, due to repeated declines in steel consumption and prices by the property sector and the slow progress of infrastructure projects.

China’s crude steel output in January and February amounted to 167.96 million tonnes, up by 1.6% from 165.31 million tonnes in the first two months of 2023, according to NBS data.

Steel market participants doubtful about implementation

China’s domestic steel prices picked up after the NDRC’s notice, but market participants were not very bullish because they did not think steel mills would reduce production rates sharply in the short term.

For instance, Fastmarkets’ price assessment for steel reinforcing bar (rebar) domestic, ex-whs Eastern China was 3,360-3,380 yuan ($464-467) per tonne on Monday April 8 (the first working day after Tomb Sweeping Day break on April 4-6), up by 30 yuan per tonne from 3,330-3,350 yuan per tonne on April 3.

“Many steel mills running blast furnaces can make profits, so they don’t want to be the first to reduce production,” a Shanghai-based rebar trader said. A few of their suppliers were mills running electric-arc furnaces, and these mills were reducing production recently due to the loss in margins.

“If local governments don’t issue any notice to order steel mills to reduce production, [steel] supply might remain sufficient, and this would continue to put downward pressure on steel prices,” a second Shanghai-based rebar trader said.

Some sources in China’s finished steel market were skeptical about the support from the possible production cuts for finished steel product prices, believing that the cost of steelmaking raw materials – iron ore, coking coal, etc. – plays a more important role in supporting steel prices.

“Only a significant rally in prices for raw materials after the previous sharp decrease or a substantial pickup in steel demand could bolster spot steel prices,” a third steel trader in Shanghai said.

Demand for steelmaking raw materials could dampen in long term

Some market participants said that China’s crude steel production adjustment in 2024, or official signs of it, would finally dampen the demand and prices for steelmaking raw materials in the industry.

“The crude steel production cut would dampen prices for iron ore and coking coal, but the final impact would depend on the implementation [of production cuts] in the long term,” a mill source from southern China said.

A Beijing-based mill source said iron ore prices could fluctuate more because the crude steel production cut might either reduce demand for iron ore or increase mills’ capability in raw material procurement if the production cut helps bring decent steelmaking margins.

A few sources in China’s domestic coal market were bearish on coking coal prices after the notice, considering demand reduction, sources told Fastmarkets.

“China has not yet announced any specific plan, but Chinese steel mills and cokeries are cautious in raw material procurement because they expect further prices drop in the market,” a Beijing-based coal trader said.

Some steel mills in Hebei province and Tianjin city announced coke price cuts of 100-110 yuan per tonne from April 9. This was the eighth round of coke price reductions since January this year.

Several market sources said that the ninth round of coke price reductions could be possible if steel prices and demand remained weak in the short term.

Ferro-silicon and vanadium market participants, however, have shown little response to China’s annual crude steel production adjustment so far, sources said.

“Before the announcement [made on April 3], I suppose many ferro-silicon market participants already expected this year’s crude steel output would either be the same or lower than last year,” a China-based ferro-silicon trader source said.

“Undoubtedly, the crude steel output adjustment may give more bearish sentiments to the ferro-alloy markets, but it may take some time, at least for now, to reflect on ferro-alloy prices, because ferro-silicon and vanadium are the upstream raw materials [in the steel industry],” a second China-based ferro-silicon trader said.

“The crude steel output cut will inevitably reduce the demand for manganese ore and manganese alloys,” a manganese ore trader source in China said. “But the manganese market still has its cushion for it, being listed as one of the critical minerals and due to its increasingly diversified needs in other downstream industries.”

We provide more than 250 steel prices, including industry benchmarks from across the globe. Fastmarkets’ steel price data combines the intelligence of industry-leading brands such as Metal Bulletin, American Metal Market, Scrap Price Bulletin and Industrial Minerals. Talk to us about our steel price data options today.

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