Will China Continue its Production Cuts post Mar'18?

The big question

China has been taking serious measures to control pollution and improve its air quality caused especially by steel sector. During winters the pollution emitted from steel manufacturing units creates heavy smog. Thus in an effort to have clearer skies, Chinese government had directed its 28 northern cities to cut their steel output up to half from 15 Nov'17 to 15 Mar'18.

With the month of March approaching near, a big question that was hovering was whether China will stop its production cuts or will continue the same in the upcoming months?

Recent updates of production cuts by Tangshan city

Now, in the latest update received on the matter, China's biggest steelmaking city, Tangshan (which has annual steel production of more than what U.S. produces in single year) has proposed further production cuts for 244 days starting from 16 Mar to 18 Nov, 2018.

These extended restrictions will cover about 6 to 10 MnT of steel production capacity in Tangshan city. Major mills like Tangsteel Company which is a unit of HBIS (Heibi Iron and Steel) Group and privately-owned Tangshan Guofeng Iron & Steel Co. Ltd have been proposed production cut of 15%. While others in the city may be ordered to follow cuts of 10% which can be increased if air quality worsens. The mills that have not obtained licenses to discharge pollutants will be ordered to halt production.

Tangshan city which is located in Hebei province was ranked as 10th most polluted city in the country by Ministry of Environmental Protection last year. In 2017, Hebei province produced 191 MnT of crude steel which is nearly 20% of China's total steel output for the year and Tangshan accounted for over half of the total Hebei's steel output.

Likely impact of production cuts

China has ordered production cuts not only to control pollution but also to curb its excess overcapacity amid tepid domestic demand. In 2016, the Chinese government had announced steel capacity cuts of about 120 to 150 MnT by 2020. And over past two years the country was able to curb 65 MnT and 50 MnT of steel capacity in 2016 and 2017 respectively.

This production cuts extension plan is a proposal by Tangshan government and is still in consultation phase that could be revised further. However, if this proposal gets accepted, China's domestic steel prices may surge up further while its steel exports may become more restricted for the year 2018.