China's Oct crude steel production falls to 10-month low. What lies ahead?

• Raw material prices, squeezed margins, decarb goals limit output
  
  
• Production to remain on lower side in Nov
  
  
• Further policy boosters likely next quarter
  
  

Morning Brief: It seems all the efforts made by the Chinese administration to curb crude steel production are bearing fruit and how. The country's production in October 2023 fell to a ten-month low of 79.09 million tonnes (mnt), down 1.8% y-o-y, as per data released by the National Bureau of Statistics. This fall also marked the second consecutive month of y-o-y decline.

Daily crude steel production in October concurrently decreased by 186,000 tonnes (t) m-o-m or 6.8% to 2.55 mnt with the decline deepening by 5 percentage points. The drop to 2.5 mnt level was reached for the first time since December last year.

Over January-October, 2023, crude steel output was at 875 mnt, up a mere 1.40% y-o-y.

Reasons for fall in production

Overall, the daily output of pig iron, crude steel and finished steel all registered a m-o-m decline, and the production pace of domestic mills showed an overall slowdown due to the pressure of continuous losses.

In October, a combination of factors kept production restrained. These included the complex international environment, sustained policies to bolster the domestic economy, the impact of previous policies, the lower-than-expected downstream demand, and resilience of raw material prices.

Rising raw material prices: Even after the Mid-Autumn Festival and National Day, the Chinese steel market lacked momentum, while Chinese steelmakers were in an extremely difficult situation in terms of profitability due to soaring iron ore and coking coal costs.

Iron ore fines, CNF Rizhao, touched $119/t in October, up 27% y-o-y while met coke showed a m-o-m increase of 8% at $334/t.

Squeezed profitability: As per some sources, production declined in October more due to squeezed margins rather than as an offshoot of policies on production cuts or even against measures to control air pollution in the autumn and winter seasons.

Prices of HRCs, exw-Tianjin, fell around 3% to RMB 3,784/t ($525/t) in October compared to both August and September and were 10% down from the RMB 4,232/t ($587/t) levels seen in March this year. Similarly, rebar was also down slightly m-o-m in October at RMB 3,706/t ($514/t) and a far cry from the RMB 4,199/t ($582/t) seen in March.

Excluding January-February, 2023, a period for which the monthly breakdown is unavailable, monthly production of crude steel has fallen below 80 mnt since December last year. Production from the large and medium-sized mills has slowed down for four consecutive months till October. Their daily output of crude steel was at 2.015 mnt, down 4.9% m-o-m and 2.5% y-o-y.

Decarbonisation pressures: While this is an ongoing process since the last couple of years, the pressure is mounting as China nears its emissions peaking target of 2030. Thereafter, it will follow a path to carbon neutrality which will culminate in 2060. China's steel sector is its second-highest carbon emitter. Some of the major mills, meanwhile, have pledge to reach their carbon peaking earlier than 2030.

Thus, from the macro perspective, the production cuts are a function of China's decarb goals and the "flat control policy" is one of the means to achieving the same.

Way forward

Production: Looking at the short term, China's crude steel production, in keeping with the trend seen since July 2023, is likely to fall further in November, 2023, by 5% m-o-m to 75 mnt and remain stable m-o-m in December. The daily crude steel output in November, correspondingly, is also expected to decline to 2.50 mnt. Within this, the daily crude steel output of the key large and medium-sized mills will likely hover at around 2 mnt.

Mills wary of increasing production: Domestic prices have shown an uptick in November. But the mills will be wary of increasing production in the near term because of rising raw material prices, sustained losses and expectations of further policy support.

Mixed signals up ahead: Mixed signals are emanating from China for the remaining part of the year as well as the January-March quarter. On the upside, policy props and pre-winter restocking prospects offer hope.

On the downside, government intervention in the event of sharp spike in prices, cannot be ruled out. Secondly, if demand remains sluggish, which may well be especially since China is entering an off-season period, the price rally will fail to sustain. Thirdly, raw material prices will also have to be factored in next quarter and influence production volumes. If cost pressure sustains, mills would want keep production lower to cut losses.

Further policy boosters expected: Also, with the twin props of policy boosters and exports having failed to support demand fully so far, the buzz is that further enabling policies could be on the anvil, possibly in Q1, 2024. As per a source in China, interest rates may be further lowered.