China crude steel curbs to continue in 2022; factors to watch out for

• China to keep crude steel output lower in 2022 y-o-y
  
  
• But easing of lockdowns to contribute to production
  
  
• Raw material prices may head south on lower Chinese demand
  
  
• Exports may slow down due to higher offers, production cuts
  
  
• Domestic prices could stay on higher side
  
  

Morning Brief: China's National Development and Reform Commission (NDRC), on 19 April, 2022, announced the country will continue with the crude steel reduction policy. The efforts of 2022 will only help to sustain the 2021 goals of 30 mnt of reduction.

A SteelMint source in China informed that although the goal is the reduce production y-o-y in 2022, the government did not reveal any specific figure on how many tonnes will be produced this year. But it sets the tone for output lower than 1.033 billion tonnes seen in 2021.

"This new policy means the output this year will be lower than that of 2021, although the extent is not specified. I guess this leaves room to increase output when demand picks up at a later stage," the source informed.

Factors to watch out for

Crude steel output impact to be moderate? The output of crude steel in Q12021 was 243 mnt, down 27.66 mnt or 10.5% y-o-y. The output in the remaining quarters is expected to touch 790 mnt, equating 87.70 mnt each month, if the total volume has to remain same as in 2021, at 1.03 bnt.

In March 2022, output was 88.300 mnt, a y-o-y decrease of 6.40%. The daily output was 2.85 mnt per day, a m-o-m increase of 6.39% in February over January. The cumulative daily output over January-February increased by 3.13%.

Although resumption of production continued in April, the pandemic and logistics challenges curbed output in the early stage of the second quarter. On the basis of the reduction in the first quarter, the decline in crude steel production in the next three quarters will be relatively limited, and the impact will be moderate.

Meanwhile, with the easing of lockdown in Tangshan since 11 April, crude steel output will see an uptrend. Also, Q1 saw eight new blast furnaces being commissioned under the capacity swap policy which have added around 6 mtpa.

Uncertainty over raw materials demand: As soon as this policy was announced, finished prices on futures exchanges trended up sharply but raw material showed a significant drop. Iron ore and coke prices fell by around 3%. Coke and iron ore futures also fell. The downward impact on raw material prices is expected to be long-term and apply a southward pressure on finished prices.

Production curbs, along with Covid surge and short-term demand drop, are having a negative impact on raw material prices too.

But, overall, there will be uncertainty over raw material demand.

EAF goals intact: Importantly, where scrap is concerned, in view of its inadequate supply, the shortage may continue and see a declining contribution to crude steel output.

China is looking to increase EAF steel's share but it will require measures and time. At present, the cost of EAF steel is still higher than the BF-BOF route by about RMB 300-400/t.

China, by policy, removed almost all export tax refunds on steels in 2021 and resumed scrap imports from the beginning of the year to retain more scrap within the domestic market. The policy of expanding EAF steel's share will not be affected as this is in line with the lower emission targets and meeting carbon peak by 2025 and carbon neutrality 2060. It is estimated that by 2030, the EAF capacity will rise to 34% of the total steel output. "The current scrap supply strain, I think, is temporary and particularly affected by the Covid resurgence in regions. In the long run, availability will be higher. It is expected that by 2030 recyclable steel scrap will reach 340 mnt," said the source.

China is estimated to have consumed around 330 mnt, although in 2020, this was around 200 mnt (up 2% y-o-y) and 220 mnt as per BIR data.

Will exports dip on high prices, production cuts? Though steel exports during January-March, 2022 marked a notable decrease, the Ukraine-Russia conflict helped to increase the price gap between Chinese and overseas markets, allowing mills to lean more towards exports.

Steel export booking in March surged but the actual loading volume may decrease m-o-m due to narrowed profit margins in February and January, 2022. The loading volume in April is expected to be high and increase notably in May. Items exported are mainly HRCs, followed by plates, wire rods and cold rolled products.

The export market is stable currently with some trade happening for South East Asia and the Middle East at comparatively higher offers compared to domestic. Offers from Chinese mills have climbed m-o-m. As a result, steel exports may rise in the short term but may remain subdued in the medium-to-long term.

However, Chinese prices are heavily competitive even after rising. For instance, average HRC export offers in March 2022 rose 18% y-o-y and 8% m-o-m to $879/t FOB. Offers form Japan have been consistently higher, SteelMint notes. For instance, in April, till date, FOB offers from China were at $918/t against Japan's $925/t, and in March, at $879/t and $921/t respectively.

However, June shipments have dipped especially with EU demand on the wane.

Moreover, production cuts may also discourage exports.

Prices may remain high: The policy announcement on 19 April saw SHFE HRC Oct futures fall RMB 22/t towards close but revive a sharp RMB 59/t next day. Rebar dropped RMB 52/t but regained RMB 95/t next day.

Both demand and supply are weak at present, but reduction in crude steel output, firm raw material costs and the higher export prices may keep domestic prices on the higher side.

"Going forward, steel prices will remain high once Covid is effectively put under control and stimulus measure, both fiscal and monetary, click in to give the economy a boost," said the source. Moreover, high export prices and production cuts will support higher prices.

Demand from realty to stay subdued: Rise in domestic demand will support higher prices. Accelerated automotive production spells good news for HRCs and CRCs but the government has made it clear it will crack down on unfair competition and hoarding.

Demand from real estate is not encouraging. Lockdowns have impeded construction steel demand too. Overall, subdued construction will weigh on steel demand in the coming months.