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China’s steel output cuts remain too small to buoy steel markets

China’s daily crude steel output retreated in mid-October with Chinese steelmakers under growing pressure amid poor sales margins. However, in the absence of government-mandated production cut orders, China’s overall reductions in steel output remained too small to boost steel prices.

The Chinese government has remained muted over steel output curbs for 2023 as of late October, leading market participants to expect that there may be no mandatory steel output cuts this year, and thus any output declines in the fourth quarter could be relatively modest, leaving total crude steel output in 2023 above 2022 levels.

Given high steel production but sluggish domestic demand, some market participants expected Chinese steel prices to drag on at lower levels, while iron ore costs remain high. The squeeze on steel profit margins could continue for the rest of 2023, they said.

Steel output
China’s daily pig iron and crude steel output for Oct. 11-20 declined by 0.5% and 0.7% from early October to 2.365 million mt and 2.717 million mt respectively, China Iron and Steel Association data showed.

As a result, the daily pig iron and crude steel output for Oct. 1-20 averaged 2.371 million mt and 2.726 million mt, down 0.6% and 0.4% from daily averages in September, but 3.8% and 6% higher on the year, S&P Global Commodity Insights calculations based on CISA and NBS data showed.

Finished steel inventories at steel mills and spot markets monitored by CISA totaled 25.51 million mt on Oct. 20, about 3% lower than a year earlier but still 10% higher than in the same period of 2021.

In order to keep China’s 2023 crude steel output within 2022 levels, for the purpose of decarbonization, the daily crude steel output over November-December has to decrease to an average of 2.269 million mt, down 17% from October, S&P Global calculations showed.

Some market sources said it was almost impossible to trim steel output to such a large extent within just two months, and the government might also keep muted over output cuts for this year, given that economic growth was a top priority.

“Steel profit margins are not good, but most steel mills are still reluctant to reduce their production, because the best option for each mill is to keep production high until other mills can’t afford to lose and start cutting production first,” one market source said.

Without widening steel output, the Chinese steel prices and margins were unlikely to improve, some trading sources said, adding the domestic steel demand might stay sluggish in the foreseeable future, given the property sector slump, soaring local government debts and sluggish consumer spending.

On Oct. 24, China decided to issue Yuan 1 trillion ($136.7 billion) worth of sovereign bonds to support infrastructure construction. But market sources expected only a limited boost for short-term steel demand, as part of the bonds would be used directly or indirectly to repay or replace existing local government debt, while the rest were mainly for water conservation projects with relatively small demand for steel.

Poor margins
Chinese rebar producers are currently at a loss around Yuan 200/mt, while hot-rolled coil producers are at breakeven or a slight loss, according to market sources.
The high steel production but sluggish domestic demand have kept iron ore import prices high but steel prices low for much of 2023, some sources said.

According to S&P Global data, the average Chinese domestic rebar prices during Oct. 1-25 were 8% lower on the year at Yuan 3,785/mt ($517/mt), but the average of IODEX CFR CHINA 62% Fe over the same period were 25% higher at $118/mt.
Source: https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/metals/102623-chinas-steel-output-cuts-remain-too-small-to-buoy-steel-markets

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