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10% STEEL OUTPUT CUTS IN H2 IN CHINA – RATIONALES, IMPACT, CONTINGENCY -
AND ANOTHER SUPPLY CHAIN CHALLENGE
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Steel Production Up 8% First 7 Months but Output to be Cut 10% for H2 2021
The National Bureau of Statistic in China reports that the country made 649.3 million tons of steel in first seven months of 2021, up 8% from 2020. However, the government has ordered steel mills to ensure that the annual crude steel output in 2021 should not exceed the output as in 2020. In other words, approximately 10% of total output needs to be cut in H2 to restrain emissions and reach de-carbonization goals, which is part of President Xi Jinping commitment per his speech at the UN Summit September 2020.
“Since late June 2021, Beijing has dispatched inspection teams to local governments and mills to check that cuts in steel capacity and output are being implemented, shutting down outdated blast furnaces and limiting production at more heavily polluting plants.” - www.mining.com
If China successfully maintains the 2021 annual output at the 2020 level, it will be likely that there will be a shortage of 20-30 million tons available in the domestic market in H2 2021, according to some market sources. Both the iron ore price and quantity contracted have significantly drop recently: $148.99/ metric tons on Aug 17 for 62% iron-ore fine delivered to China vs $219.77 for the equivalent on July 16. With the cut, the situation becomes volatile.
Export Rebates Cuts and Tariffs Removed for Scrap Steel Imports
Alongside with the Steel Production Cap plan, the State Government also changed its export taxes policy to “reduce incentives to produce steel for international markets”. The government cancelled export tax rebates on some steel products in May and raised export tariffs on crude form of iron in July.
Simultaneously, the scrap steel import tariff was removed in April to encourage steel mills to increase the content of scrap steel in their production to reduce the reliance on Iron Ore and emissions in the hot smelting process.
Perfect Timing or Perfect Storm?
The objective of the crude steel production cap is to reduce carbon emission by focusing companies with poor environmental performance, high energy consumption and outdated technology and equipment.
Some analysts believe this is the right time to implement the production cut plan in China because domestic demand is expected to slow down due to the effects of hot and rainfall weather across the country in the last few months, Covid-19 cases, and the slowing of the real estate market. In addition, cutting steel output from November to February has been a normal practice to reduce “Winter Smog” since 2017. It is believed that tighter controls implemented this year is to prepare for the Winter Olympic which will be held at Beijing in February 2022.
However, some observers with pessimistic views are afraid that the production cut will have severe impacts to steel mills industry because global steel demand is fueled by the “economic recovery” programs worldwide and most of the steel mills overseas are nearly in full capacity. Chinese steel producers are facing lower margin impacts from oversea competitors lowering raw material price and export tariffs limiting their exporting volume.
Improving environmental performance, reducing energy consumption, and upgrading technology and equipment equals to considerable CAPEX reinvestment. This means the price of steel along with its supply chain will increase. This would potentially increase the government’s effort of price stabilization.
Potential Impacts Across the Supply Chain
CCA sees that the price pressure and supply shortage will ripple along the Supply Chain Network and impact the stakeholders in the downstream:
Judging and forecasting the impacts of the steel output cap in 2021 is rather complicated and difficult to reach a firm conclusion because different parties will benefit or suffer from the campaign. However, to those who have considerable amount of steel and iron in their lines:
As the capacity cap has only been launched for a few months, CCA projects that more impacts and new challenges will surface in the upcoming quarters as more parties adapt the new regulation.
(Note: If you provide us the HS Code of the steel product or material that you have interest or concern, we can provide the information such as export tariff, tax rebate information free of charge. Please provide us the HS Code and your contact details at firstname.lastname@example.org.)
SHANGHAI ZHUHAI HONG KONG TAIPEI CLEVELAND