China's Steel Sector to face Weak Demand and Production Surge ahead in H2 2019: CISA

Despite the ongoing trade war between China-U.S. that has generated concerns of slowing demand growth, Beijing is continuing to churn out record levels of steel output. Subsequently amid this production surge, CISA (China Iron and Steel Association) has warned of the risk of an steel output increase in the country this year and have asked steel mills to raise their production rationally.

As a part of supply-side reforms, China has already eliminated 150 MnT of its outdated crude steel capacity in time span of three years. However, some of this capacity has been replaced by big production complexes with modern and more efficient equipment that has lower emissions.

In first four months of 2019, China has churned out 314.96 MnT of crude steel, up 10.1% from same period last year and accounting for 53% of the world's total, encouraged by strong profitability at Chinese mills and robust demand from the construction sector so far this year.

CISA's deputy director has expressed his opinion that with the completion of capacity reduction in the steel industry and weaker-than-expected environmental measures, it is very hard for China to trim more of its current steel (output) with administrative means (such as the production restrictions).

He has also warned of waning steel demand growth in China's property market due to weaker financial support and declining fixed-asset investments from the central government in the second half of this year. However, he added that their forecast for 2019 continues to remain higher by 1-2% against 2018 but the demand from automobile, household appliances, and energy sectors will be weaker.

Tangshan eases production cuts in June

According to the data from National Bureau of Statistics, Hebei - China's top steelmaking province, was responsible for a large part of the steel output growth in January-April, adding 12.04 MnT over last year, about 46% of the total increase in output across the country.

Now as per the latest updates, Tangshan (top steelmaking hub of Hebei province) has told its mills to cut production in June by the same level as that of winter heating season, which means that most of these steel mills' output cuts in June would be around 39.3%.
While some of the mills are subject to higher cuts of 53-60%, about five mills with better environmental records have been ordered to reduce their production rates by just 20% and about eight mills with a combined capacity of 23.3 MnT are exempted from the output cuts in June as they are relocating to the rural area.

Now while the seller side is worried that the looser output restrictions will further pressurize the prices in June which is already a slow season for construction demand, few market participants are of the opinion that this won't have any impact as the output cuts in previous month of May were also not strictly implemented and that steel mills in May month have already reached to their full capacity thus limiting the scope of further increase in their production.