China: Will bearish outlook lead to steel production cuts?

The market outlook seems bearish due to weak demand and a significant drop in production costs. To address the current negative momentum, a focused production cut may be necessary, involving consecutive reductions in hot metal output.

The decline in rebar prices aligns with market expectations, while there are mixed signals regarding hot rolled coils (HRC) exports. Although there have been discussions about implementing direct export tax controls, reports indicated that exports have remained strong, even reaching new highs last week. This surge appears to be driven by a rush to export ahead of stricter tax regulations.

In the short term, the steel market remains bearish, with valuations losing their previous support from average EAF production costs. Production costs are only a reliable indicator when there are no significant supply-demand discrepancies or expectations of demand collapse.

Currently, demand expectations have weakened considerably, evidenced by: 1) a w-o-w decline in steel demand, 2) high iron ore inventories, and 3) falling coking coal prices. These factors contribute to downward pressure on steel futures and suggest the need for production adjustments.

Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.