China may struggle to drive steel output lower in 2021 as gl

HIGHLIGHTS

High steel prices, margins will see Chinese mills lift utilization rates -- undermining plans to lower the country's output

Soaring global steel prices will make Chinese exports competitive -- regardless of any export tax rebate reductions

Singapore — China's plans to lower its crude steel production in 2021 could be challenged by the resultant high steel prices incentivizing mills to lift their operating rates, which would offset output reductions elsewhere. The net result would be at best a marginal lowering of overall production, and in all likelihood no reduction from last year's levels at all, S&P Global Platts Analytics estimates
 
China's domestic hot-rolled coil prices have risen around 12% since early March, reaching their highest level since mid-2008. The most recent round of price rises has been driven mainly by Tangshan city's suspension of 30% of its blast furnace capacity, and there is market anticipation that similar output cuts will be extended beyond Tangshan in a bid to achieve the Chinese government's target of reducing steel production in 2021.
 
Jiangsu province's iron and steel association on April 2 called for steel output controls, and northern China's Qinhuangdao city is understood to be poised to suspend 30% of its iron and steelmaking capacity.
Jiangsu province produced 121 million mt of crude steel in 2020, accounting for 11% of China's total output, according to the National Bureau of Statistics. Qinghuangdao city has total crude steel capacity of more than 12 million mt/year.
Tangshan's output cuts have led to the suspension of about 34 million mt/year of pig iron capacity since mid-March. This has in theory has temporarily reduced China's overall pig iron capacity from 1,032 million mt/year at end 2020 to 998 million mt/year currently. But it is still much higher than China's realized pig iron output of 888 million mt in 2020, according to Platts Analytics.
Platts Analytics expects rising steel profit margins spurred by the output cuts in Tangshan to result in a lift in utilization rates at the remaining 998 million mt/year of pig iron capacity from around 87% in late March.
If utilization rates are lifted to around 90% in April, an additional 10 million mt/year of pig iron capacity would need to be suspended to get China's annualized pig iron production rates below last year's level. If utilization rates reach as high as 95% -- incentivized by soaring profits -- then an additional 60 million mt/year of pig iron capacity would need to be taken offline.
China's domestic HRC margins stood at $138/mt April 6, while rebar margins were $111/mt, according to S&P Global Platts data.

More capacity in 2021

Furthermore, China will add another 18 million mt/year of net pig iron capacity and 30 million mt/year of net crude steel capacity in 2021. This means that as newly commissioned facilities gradually ramp up production, China will have to suspend even more iron and steel capacity in the second half of 2021 to meet its goal of lowering production.
China is considering reducing steel export tax rebates to decrease steel exports and indirectly discourage steel production. Though it remains unclear when and how the rebate cuts will be implemented, market consensus suggests the government would like to see China's steel exports drop by around 20 million mt in 2021 from just under 54 million mt in 2020.
However, given global steel supply is tight, the removal or lowering of China's export rebates will contribute to even higher global steel prices. This means Chinese steel exports would still be economic, regardless of changes to the export rebate.
Market participants expect export tax rebates for long steel, HRC and plate to be reduced from 13% to 9%-4%, or possibly removed altogether.
Based on domestic prices on April 6, export offer prices for Chinese Q195 grade HRC could be around $913/mt CFR if the export rebate is 0%.
Offers for Indian HRC SAE grade HRC were heard at $920/mt CFR Vietnam April 6, up about $100/mt from just two week ago. On April 7, Japan was heard offering the same material at $1,000/mt CFR Vietnam for early June shipment.
Conversely, rising global prices will make it difficult for China to increase its iron and steel imports. Based on January-February customs data, China's iron and steel imports in 2021 are forecast to decline by 16 million mt year on year.
Even if China's steel exports drop by 20 million mt/year year on year, supply shifting from overseas to domestic markets could be as low as 4 million mt.