FOCUS: Key effects of China’s latest industrial crackdown in Tangshan on steel sector

A crackdown on industrial activity in Tangshan, China’s steelmaking hub, is sending jitters throughout the sector. Fastmarkets examines what it means for the steel industry.

Local authorities in the city issued a notice on the evening of Tuesday March 2 to say that it was embarking on a strict crackdown over March on industries that lag behind in terms of measures to lower emissions, with some actions possibly lasting months if the situation does not improve.

The crackdown consists of 10 measures, which include the phasing out of outdated equipment and capacity, the implementation of strict emissions-reduction controls, cutting down the use of heavy-duty trucks and intensifying inspections.

Decommissioning of blast furnaces
Seven 450-cubic-meter blast furnaces have been ordered to shut down by March 10, but these are not new requirements. The shutdowns are part of a capacity swap program that involves bigger blast furnaces replacing them.

Affected mills include Yanshan Iron & Steel, Tangshan Stainless Steel, Huaxi Iron & Steel and Rongxing Iron & Steel. Xinbaotai Iron & Steel will also shut down all of its production facilities.

“The shutdown of certain blast furnaces in Tangshan was priced in by the market long ago, so the impact is not expected to be significant.

“But the ongoing restrictions on emissions will weaken demand for iron ore in Tangshan. Demand is not likely to recover soon considering the ‘twin sessions’ will take place [this week],” a buyer source in Tangshan said.

China’s legislative body, the National People’s Congress, and its top-ranking political advisory body, the Chinese People’s Political Consultative Conference, are holding their annual meetings – also known as the twin sessions – in Beijing on Thursday and Friday.

“Larger blast furnaces that will replace these smaller ones are also expected to start up in the first half of 2021, which would mitigate any drop in steel output,” the source added.

Iron ore prices could still get support from rising prices for finished steel, so the shutdown of these blast furnaces may not necessarily equate to a definite fall in prices for the steelmaking raw material, a steel mill source told Fastmarkets.

In fact, Fastmarkets’ iron ore indices cfr Qingdao rose on Wednesday amid bullish steel prices.

The iron ore 62% Fe fines, cfr Qingdao index was at $176.40 per tonne on Wednesday, up $0.85 day on day and compared with $172.71 per tonne a week ago.

Twin sessions effect?
While the official notice did not mention that the crackdown is related to the two top-level annual meetings taking place in neighboring Beijing this week, the timing is very close.

The twin sessions have been raised as triggers for environmental controls in past years, but several market sources said the current crackdown is merely a continuation of the restrictions on sintering and coking activity which is already taking place in Tangshan.

Officially, local authorities in Tangshan have cited the city’s poor air quality as being the basis for the crackdown.

Tangshan is already experiencing the effects of China’s annual heating season, which stretches over autumn and winter. During this period, measures to lower emissions are intensified in northern China to offset the coal-fired heating systems that come online to deal with falling temperatures.

The actual effect of the latest crackdown on steelmaking raw materials such as coking coal will depend on steel mills’ and coking plants’ adherence to the prescribed restrictions, a coking coal trader in Tangshan told Fastmarkets.

Not all companies in the ferrous supply chain carried out production curbs fully in 2020, according to a source at a Tangshan coking coal plant. “We are waiting for the specifics from local authorities in Tangshan and will follow other companies’ lead in curbing production,” he said.

Effect on steel market
Tangshan’s billet price surged by 140 yuan ($21) per tonne on Wednesday morning to 4,410 yuan per tonne due to market participants’ expectations of tighter steel supply and steady downstream demand in the wake of the crackdown.

“Billet prices have reached a nine-and-a-half-year high,” an industry analyst pointed out.

But end users may not make purchases straight away because they are unable to preserve their margins, sources said.

“This is especially since domestic billet prices may see some corrections after the sudden large increase, so billet importers are not willing to risk paying high prices for imports,” a trader in eastern China said.

He estimates workable prices for imported billet at no higher than $600 per tonne cfr China, though he said he had heard about offers of around $610 per tonne cfr.

A Shanghai-based trader said hot-rolled coil prices were surging in eastern China on Wednesday morning after news of the crackdown in Tangshan led market participants to restock.

“Spot prices for HRC in Shanghai have already increased by more than 150 yuan per tonne to around 5,020 yuan per tonne since yesterday,” he said.

Fastmarkets assessed the price of steel hot-rolled coil domestic, ex-whs Eastern China at 4,980-5,030 yuan per tonne on Wednesday, up by 140-170 yuan per tonne day on day and from 4,830-4,840 yuan per tonne a week earlier. 

Most market participants believe that there is more upside than downside for prices in the rest of March.

The upgrading of steelmaking facilities by major mills in past years to fit national pollution standards also mean steelmaking and steel output will be affected more than iron ore demand.

This is because the market has already taken into account the blast furnace shutdowns and the quantity needed for iron ore, with prices moving accordingly, iron ore market participants said.

“Prices for iron ore rose to decade-high levels in December and January year despite steelmaking restrictions being in place to cut emissions,” a Singapore-based trader said. “Steel production cuts will be the key factor. Falling steel inventories will most likely push up prices for various steel products.”

Transport restrictions
Another restriction is that industrial companies in Tangshan that use vehicles for logistics are not allowed to use heavy-duty trucks with emission standards below that of National IV standards. This includes gas-powered trucks. Vehicles which adhere to National IV standards typically face stricter emission standards, typically capped at 4 g/kWh of carbon monoxide, 0.55 g/kWh of non-methane hydrocarbons and 3.5 g/kWh of nitrogen oxide.

They can also only use National V standards or higher, or new energy vehicles.

They also need to reduce the number of transportation vehicles operating within their factories by 50% for the duration of the crackdown.

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