China Witnesses Increase in Steel Output during 2018-19 Winter Production Cuts

In its war against pollution, steel mills in China have been enforced to follow production cuts for during winter season starting from November to March especially since last three years. While Beijing had imposed curbs on 28 cities in north, east and central China to make a 50% reduction in blast furnace output in the 2017-18 winter season, in 2018-19 China allowed its cities to choose their own methods to enforce cuts. Subsequently, those companies that were compliant to environmental rules produced at a higher rate as compared to less compliant ones.

This resulted in the lifting of China's winter steel output in 2018-19 as compared to the previous year. According to China's production stats Chinese mills produced 42 MnT of additional crude steel output during November 2018-March 2019 against the corresponding period or previous year 2017-18, thus restricting any upward movement in country's steel prices and profits in the short run.

China produced 383.64 MnT of crude steel in November 2018-March 2019 compared with 341.49 MnT in the same period a year earlier.

After March 2019, output restrictions have been lifted in most cities, although Tangshan -- China's largest steel-producing city, will continue to partially enforce steel output and sintering restrictions until September.

China's steel prices and profits slumped in November on slower demand and have made a slow recovery since then. Higher supplies of steel, especially flat products, because of looser environmental restrictions have been the main source of pressure on steel prices. With output restrictions mostly lifted, supplies will remain at high levels over the next few months.

Steel mills' inability to lift prices sharply has kept profit margins around low as prices of iron ore, a major cost component in steel production, has increased by around 30% since November on supply disruptions in Australia and Brazil.

The pick-up in steel demand has met expectations this month on the back of stellar growth in real estate investments and new project start-ups. But with hints that Beijing may be looking to ease stimulus measures amid an economic recovery, there could be downside to real estate and steel demand in the short term. This will make improvements in profit margins harder for mills in an oversupplied market.