LONDON, November 22, 2017 /PRNewswire/ —
Following structural supply reform in China, steel mill capacity utilisation has already increased to 85%. Any further supply tightening from the winter “heating season” cuts will increase margins and steel prices. But, the depth, pace and timing of cuts are highly uncertain and they may not reach the 50% mandated by the government.
The steel supply chain will respond, partially or fully mitigating the impact of insufficient hot metal supply on finished steel markets. This Insight presents our expectations for the Chinese steel market balance over the winter “heating season”. We examine three scenarios and present a new base case which is consistent with CRU’s revised higher steel price forecasts which we are releasing to Market Outlook subscribers.
Chinese market to tighten further
Capacity closures in the Chinese steel sector over the last two years have fundamentally changed the structure of the industry. This winter will likely see the market tighten further as cuts to iron and steel production are mandated in order to try and manage air pollution in major population centres over the winter “heating season”.
The primary targets of production cuts are sinter and ironmaking facilities in Hebei, Henan, Shanxi, Shandong and Tianjin regions which together account for around half of all Chinese iron and steel output. These face having to make production cuts of 50% during the heating season starting around now and ending mid or late March 2018.
Instructions to reduce output are, or will be, issued to individual steel producers. The precise means by which this must be achieved is dependent on the individual company or steelworks, and may include an instruction to close specific facilities (sinter plants or blast furnaces), and/or reduce output at others which continue to operate, depending on the specific configuration of assets. The overall 50% target has been made clear and some enforcement of this through the winter is certain. As we write, some facilities have been ordered to close while others are still awaiting instructions though these could follow soon.
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