Newly commissioned steel capacity in China adds to supply pressure

China’s steel production continues to show a slight decline despite weak profit margins for steelmakers, due to new pig iron and crude steel capacities launched in recent months, while the absence of production cuts on a large scale fails to increase the pressure on production.

North China, home to major steelmakers, could see winter production cuts from mid-November, particularly in the steel hub of Hebei, market sources said.

But these brakes should remain smaller than the previous year, they added.

Chinese steelmakers are usually ordered to cut production during the winter to reduce pollution.

Setting a bearish tone for steel prices, several new pig iron and crude steel manufacturing facilities are also coming online, which could partly offset the impact of any government-imposed production cuts for 2022. and 2023, according to sources.

“I fear steel production will remain elevated this winter relative to subdued demand, so any price increases in the remainder of 2022 may be limited unless further stimulus packages are announced.” , said a market player in eastern China.
Increase in iron and steel production capacity

Between August and October, China commissioned about 6.4 million tonnes per year of new blast furnaces and 4.8 million tonnes per year of crude steelmaking capacity through capacity swaps, according to S&P Global Commodity Insights calculations.

Since some of the replaced facilities were already closed in the period 2017-2020, these newly commissioned facilities will theoretically lead to a net increase of 2.5 million tonnes/year of pig iron and 3 million tonnes/ year of crude steel capacity for 2022, according to calculations based on industry data.

In the first 10 months of 2022, a total of 28.8 million tonnes/year of new pig iron manufacturing capacity and 23.1 million tonnes/year of crude steel production capacity were commissioned. service in China through capacity swaps, resulting in a net increase of 8.3 million tonnes/year of pig iron and a capacity of 6 million tonnes/year of crude steel for 2022.

Although low steel profit margins have recently forced some steel mills in Shanxi and Shaanxi provinces to cut production, these newly commissioned facilities have partly offset reductions in overall steel production in China.

Some factory sources in North and East China also said that with these newly added capacities and most of the factories still refuse to cut production despite the current losses, the crude steel production of the China in October and so far in November could remain almost the same as in September.

China’s daily crude steel output in September was about 7% higher on the month and 17.6% higher on the year, according to China’s National Bureau of Statistics.

On Nov. 3, amid sluggish steel demand and a bearish market outlook, profit margins for rebar and hot-rolled coil sales in the Chinese market fell to minus $33/mt and below. $46/mt, respectively, according to S&P Global data.

Although some factory sources S&P Global spoke to expected Hebei to initiate winter production cuts around mid-November, which could ease the supply glut and support oil prices. steel.

Excess supply may persist
However, with China’s heavily indebted real estate sector and sluggish domestic consumption unlikely to generate additional steel demand for 2023, China’s steel market may remain under excess supply pressure at longer term, especially as more iron and steel manufacturing facilities continue to operate. , according to sources.

For the rest of 2022 and all of 2023, Chinese steelmakers plan to commission a total of 116 million tons/year of new pig iron capacity and 143 million tons/year of new crude steel capacity. thanks to the capacity exchange mechanism, according to an analysis. industry data.

Although the net capacity growth is minimal for these swaps, these new facilities will generally be more efficient and greener than the ones they replaced, and therefore any government-mandated production cuts for environmental protection purposes environment or decarbonization would have less impact on their production.
Source: Platts

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