Steel and raw material futures prices in China have surged for the second day in a raw on July 22. What is behind this obvious uptrend in steel prices in China - steel production cuts, promises of more stimulus measures or the cost-side support due to more expensive raw materials? SteelOrbis has surveyed market opinions, with the majority of those surveyed believing, in short, that the raw material factor is the driver this time.
Rebar and HRC futures at Shanghai Futures Exchange have surged by 3.12 percent and 2.84 percent, respectively, today compared to the previous day, even exceeding the increase seen on July 21. Iron ore at Dalian Commodity Exchange has added 2.49 percent, after the 2.08 percent gain yesterday. But all eyes in the markets have been on coking coal and coke, as today, July 22, futures prices of these raw materials both skyrocketed to the maximum limit per day - 7.98 percent.
No big mandatory steel production cuts, but…
Everything started with the meeting of the major Chinese authorities from last Friday, including CISA, and several government departments like the Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission (NDRC) and the State Administration for Market Regulation. They stressed the need to curb excessive competition in the steel industry. So far, there are no official plans for mandatory steel production cuts for the current year and many market participants do not believe they will be announced soon. “I highly doubt that we will see massive output cuts soon, so exports will be at a record high by the end of the year,” an Asian trader commented. Another source at a Chinese steel mill said that the recent announcements are important to the market as they show that the government is aiming to make a steel supply reform 2.0.
“The logic [in the market] does not change much today… and this is following a series of steel production cuts that already happened,” a Chinese trader said. China’s crude steel output in June was the lowest so far this year, at 83.18 million mt, down by 9.2 percent year on year. In the July-August, the steel production reductions are expected to continue, and the monthly rate may hit as low as 80-82 million mt in August, according to the market expectations. The output curbs that already happened were market-driven, and only some mandatory short-term cuts have been sought by the local governments of some areas (like Tangshan on July 4-15), while there are expectations that production will be cut for at least 10 days ahead of a major military parade on September 3.
The recent announcement about the curbing of excessive competition will be focused this time on the strict control of increases in steel capacity (with rumors saying all new capacities will be forbidden until 2028), while the last time it was focused mainly on the elimination of outdated capacity (up to 150 million mt of IF capacity were closed). Also, the government is planning to implement a new mechanism for capacity management, including steel capacity replacements to be allowed (when?) at the ratio of 1.25:1.
So, yes, supply reform in the steel industry in China is important and will be implemented, but, no, it will not have a direct influence on the actual steel production this year, at least not in a mandatory way.
Also, the Central Political Bureau's economic meeting will be held at the end of July, so if new economic stimulus policies are introduced, they may support the market sentiments further.
Significant cuts in coal and coke supply, demand high
This time, the main real support for steel prices has been coming from the local coking coal and coke markets. First of all, supply in the coal segment is already down significantly since June. In July, there were massive environmental inspections in Shanxi, Hebei, Wuhui and Inner Mongolia, while the elimination of outdated coking capacity in Shandong has been completed this month.
Following the production cuts, even though the inspections have finished for now, many miners are not in a hurry to resume operations at the previous levels. The lower supply has triggered demand, and on Monday the price of low-sulfur coke in Anze, Linfeng, rose by RMB 20/mt to 1,320 RMB/mt, while the local coking coal price in Changzhi, Shanxi Province, has already increased by RMB 70/mt this week.
The jump in coking coal prices has triggered the rise in local coke prices. After some negotiations today, July 22, steel mills have accepted a second round of coke price increases by RMB 50-55/mt. And market sources are waiting for at least one more round of hikes next week.
So, the market balance has been healthier in the coal and coke segments, and the price rise for these raw material products has been more justified, according to market sources.
At the same time, speculation has also been observed. There have been rumors this week about local governments asking miners to keep annual raw coal outputs at not above the announced production capacities, with monthly raw coal output not to exceed 10 percent of capacity. There has been no confirmation that these rumored restrictions will include coking coal miners, with the main focus is likely to be on thermal coal.