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The recent drop in prices for steelmaking raw materials has brought the market’s focus back on China’s policy implementation – especially the rigour with which the country will crack down on pollution in the coming months.
Metal Bulletin’s cfr China Premium Hard Coking Coal Index has fallen 7.3% since September 4 to reach $199.87 per tonne on Thursday September 21.
Metal Bulletin’s 62% Fe Iron Ore Index has dropped 15% over the same period to $66.09 per tonne cfr China.
The drops experienced by the indices were driven by actual concluded transactions – and not assessments – at lower prices, which underline a palpable change in the outlook for the steelmaking raw materials markets.
Hebei jolt
The change in sentiment was augmented last week when the government of China’s Hebei province announced plans to cut coke and steel production in the winter months, in line with the directives previously announced by the central government.
As part of the cuts, cokeries in the province’s Tangshan city have been instructed to increase their coking time to 36-48 hours between October and March, a move that would reduce production by over 30%.
The typical coking time is 18-24 hours.
Tangshan produces roughly 90 million tonnes of crude steel annually.
Blast furnace capacity utilisation rates in Hebei will also be capped at 50% from November 15 to March 31.
Hebei province produces roughly 250 million tonnes of steel annually, accounting for around 30% of China’s overall output.
This month has seen sintering and blast furnace operations being restricted at a number of mills in Handan city, also located in the Hebei province, after tighter regulations were introduced to lower emissions, according to local media reports.
While both measures – caps on blast furnace utilisation rates and coke production – should theoretically support steel prices, concerns have emerged over the sustainability of steel demand.
What goes up…
Steel output in China has grown month after month this year with producers seeing strong margins driven by robust demand.
In August, the country’s crude steel output hit a new high of 74.59 million tonnes.
In the January-August period, China produced 566.41 million tonnes of crude steel, a 5.6% rise over the same period of last year, according to data from the National Bureau of Statistics.
Strong steel prices in the first seven months of this year, alongside solid demand as underscored by output data, had provided support to the steelmaking raw materials market.
As winter approaches, however, tell-tale signs of a weakening of steel demand have surfaced.
Metal Bulletin’s assessment of domestic rebar prices in east China fell to a month-to-date low of 3,950-4,000 yuan ($599-607) per tonne on September 20, and remained unchanged the next day.
Macroeconomic data also points to the growth of demand slowing down from levels seen in the first half of the year.
China’s fixed-asset investment, which provides a measure of capital spending, including that on the infrastructure sector, grew 7.8% year on year in the first eight months of the year, down from a growth of 8.3% in the January-July period.
The Reserve Bank of Australia has already flagged a weakening outlook for iron ore prices amid an anticipated slowdown in Chinese demand.
“The iron ore spot price is still widely expected to decline over the next year or so as low-cost global supply continues to come online and demand from China is expected to ease,” minutes from a meeting of the central bank held earlier this month, which was released this week, showed.
The bank added that Chinese steel production per capita was likely to be close to its peak and growth in Chinese steel production would not add much to global demand for iron ore in the future.
Watershed meeting?
Even as recent production cut announcements have shaken confidence about sustainability of high raw materials prices, some market participants are waiting for the National Congress of the Communist Party of China next month to firm up their outlook.
The one-in-five-years meeting of China’s top political brass, which starts on October 18, has been a big driver of strict environmental governance this year.
Preparations for the event arguably began last year, when China announced its 13th five-year economic plan and front-loaded investment in key industries to polish its economic report card ahead of the meeting.
As part of the five-year plan, China’s National Development & Reform Commission (NDRC) identified the need to address overcapacity in the steel and coal sectors as it set out to become a manufacturing powerhouse over the next five years.
It also laid out plans to step up environmental governance, emphasising on the transformation of industries such as steel that consistently failed to meet emissions standards.
On all fronts – checking overcapacity and stepping up environmental governance – the steps taken this year have had a major bearing on steel and steelmaking raw materials markets.
Earlier this year, China announced plans to weed out 150 million tonnes of coal and 50 million tonnes of steel capacity.
By the end of the first half, the country exceeded its targeted production cuts for the steel sector and had met over 70% of that for the coal segment.
In the first half of the year, China also eliminated 120 million tonnes of substandard steel capacity, which pushed up rebar prices in the domestic market.
With much of the targeted capacity cuts already been met, the last quarter of 2017 could see a mellowing of steel markets gains, some market participants have said.
“The 19th congress will be a watershed event for the steel industry,” an analyst who follows the Chinese market closely said.
Others think that if steel margins continue to remain high, mills will be tempted to maintain their high output despite the government’s directives.
Chinese steel mills have registered impressive profits in the first half of this year, helped by the government’s strict implementation of excess capacity cuts, among other factors.
There is also the question of the availability of domestic raw materials in the country, especially coking coal.
Domestic prices for coking coal in China have rallied since July amid safety inspections at mines.
On September 21, the NDRC issued a notification calling for stakeholders in the domestic coal sector to maintain adequate supply levels in spite of ongoing safety checks.
The notification came on the back of a rally in thermal coal prices following curbs on imports.
Lessons from 2016 have shown that policies seeming directed at the thermal coal sector tend to also influence the coking coal market.
As the final quarter of the year approaches, the focus will return to the implementation of policy in China. But this time, the concerns are that strict implementation could “spoil the party” for the steelmaking raw materials market.
“There will be push and pull factors, but Chinese steel mills’ overall profits on average should be higher over the next five years, compared with the last five years,” the analyst added.