Is China eyeing steel production cuts in CY23? Decision likely by June

• Steel production dips 1% in CY22
  
  
• Production may fall further 2.5% in CY23
  
  
• Decarb goals necessitating output cuts
  
  
• Capacity swaps to continue
  
  

Morning Brief: China's steel production dropped a little over 1% to 1,018 million tonnes (mnt) in calendar 2022 against 1,033 mnt in the previous year. And the y-o-y production cuts will continue with a likely 2.5% expected in CY23. However, China is yet to announce any decision on the same yet. A 2.5% reduction on CY22 levels will mean around 25 mnt axed to attain 993 mnt in CY23.

Since 2021, the Chinese government has been conveying to mills, although no written communication is sent, that each year production has to be lower than the previous year's. Thus, output reduced 3% to 1,033 mnt in CY21 from a record high of 1,065 mnt in CY20.

The production cuts eased a little in 2022 (1%) possibly because the mills, expecting a strong demand rebound, opted for significantly enhanced production schedules, which led to a sharp y-o-y recovery in production.

It seems the 2.5% target was proposed by the government at a recent meeting, but nothing has been finalized yet. A decision would likely be taken by June.

Why the need for production cuts?

1. Eye on decarb goals: The production cuts are part of a long-term decarbonization strategy, rolled out from 2021, whereby the country is aiming at carbon peaking by 2030 and net zero emissions by 2060. And since steel mills have the dubious reputation of being amongst the most polluting industries, the government has come down heavily through a two-pronged approach. One is production cuts in the form of swapping of outdated polluting capacity with new-age technology and two, through actual output reductions at mills.

Mills have had to cut production through caps suggested by the government and at times through measures like environmental protection curbs or reduced energy consumption.

2. Focus on value-added steel: That apart, China is looking to decrease its bloated commercial grades production volume and focus on value-added, high-margin specialty steel items with an eye on the environment as well as the export market. These need to be produced through eco-friendly, modern technologies.

SteelMint heard from two leading private mills in Tangshan, China's major steel production hub, that they have not yet received any verbal or written communication from the government on production cuts. "But this policy - of phasing out outdated capacity - is still being implemented and blast furnaces below 1,000m3, BoFs below 100 tonnes, and sinter machines below 100m2 will still be phased out," a source at one of the mills informed.

The capacity swap ratio is 1.25:1 (old:new) for the BF-BoF route of steel-making.

Jan-Feb output up 7% y-o-y
Meanwhile, as per China's National Bureau of Statistics data, production over January-February, 2023 was already higher by almost 7% at 168.70 mnt against 158 mnt seen in the same two months last year and thus cuts are inevitable.

Although the giant has recovered somewhat from the traumatic property market collapse in 2021, and a bad second spell of the virus last year, thanks to a slew of government-backed booster packages, domestic demand was dented.

While infrastructure and engineering staged a comeback, real estate construction, automotive and white goods steel consumption may stay muted in the current year.

Outlook
A well-placed source from China observed to SteelMint that there is unlikely to be a rollout of very restrictive measures based on the fact that the economy is weak. "Cannot reduce too much to hurt an already weak economy," the source said, adding: "And the cuts may not be as much as 2.5%."

The source elaborated: "The production cuts may be done through means of energy consumption reduction or environmental protection curbs."

Many, taking a contrarian view and seeking a higher percentage drop, feel even a 2.5% output reduction may not be enough to balance out the decline in steel demand or boost Chinese steel prices in CY23.

But, China may want to avoid a steep cut, which may impact the economy. Hence, the giant is walking along a double-edged sword.

The source further informed, as per the assessment of the China Metallurgical Industry Planning and Research Institute, in CY23, demand for steel in China will be around 910 mnt, and output of crude steel may touch 1 billion tonnes.