According to global credit rating agency Fitch Ratings, the rally in China’s steel prices is expected to slow in coming weeks as the summer tends to see lower downstream demand due to subdued construction activity. However, high iron ore prices and new environmental regulations that limit supply are likely to keep steel prices elevated. Fitch Ratings expects this to benefit larger steel producers that have environmentally compliant facilities and are more resilient to production cuts.
China’s steel prices have increased since the beginning of the year as downstream producers started to replenish steel inventory. For example, rebar prices have surged to RMB 6,000/mt, up by more than RMB 600/mt from the end of April, as a result of strong demand from the construction industry as well as electronic vehicle production, the implementation of production restriction policies, and higher iron ore prices.
Production restrictions in Hebei Province are also playing a large role in the uptrend. Tangshan, which accounts for close to 15 percent of China’s total crude steel output, has implemented production restriction policies ranging between 30-50 percent throughout the year in an effort to reduce carbon emissions.
Fitch Ratings expects Hebei Province-based HBIS Group to benefit from the production cuts, as the company’s plants are largely environmentally compliant and face less production cut requirements. Meanwhile, Chinese steelmaker China Baowu Group is likely to generate above-peer cash flow that is higher than what Fitch previously expected for 2021, as its diverse production facilities and product offerings make it more resilient to local policies on production cuts.
