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Chinese GDP is on a roll this year. After turning out less steel in 2015 than the year before, the first time in more than three decades that steel production declined, 2016 is back on the rise.

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According to Bloomberg, crude steel output totaled 603.78 million metric tons in the first nine months of this year, up 0.4% from a year ago. Demand has been boosted by stimulus measures encouraging investment in the real estate and infrastructure sectors. The September output of 68.17 mmt implies that Chinese apparent steel consumption jumped 9% from a year earlier, RBC capital markets is quoted as saying.

Surging in September

This makes September the strongest month so far in 2016 and October will probably stay high as consumption typically rises in the Fall. Steel mills are being encouraged by a return to profitability and, in spite of protectionist moves from overseas, markets around the world say China’s exports in the first nine months rose 2.4% on a year earlier at 85.1 mmt, the highest ever Bloomberg says.

Nor is this stimulus and debt-fueled binge restricted to steel. Global daily average aluminum production rose to 164,600 mt from 159,800 mt in August, led by a rise in China’s output for the month to 2.75 mmt, the highest in 15 months.

A rally in Shanghai aluminum prices and demand from housing and infrastructure encouraged Chinese smelters to bring back some 1.8 mmt of capacity this year in addition to adding some 2.9 mmt of new capacity. Chinese output is expected to continue to rise, Reuters mentioned in a recent note, and suggested that prices could soften to $1,550 per mt by the end of the year as a result of excess supply. While total global primary aluminum production increased to 4.937 mmt, up 1.2% from the same month last year,  growth continued to be at the expense of western smelters with North American output falling 11%  to 325,000 mt last month.

Markets React to Stimuli

As we have seen in the past, China’s stimulus measures are rather like the sugar rush that comes and goes. Chinese GDP has been boosted or at least stabilized at 6.7% this year on the back of measures introduced by Beijing towards the end of last year.

Free Download: The October 2016 MMI Report

But, like previous stimulus measures, the result is increased debt progressively at lower rates of return and ultimately adding to more of a global overproduction problem. In the short term then, demand for iron ore, coking coal, bauxite and alumina looks set to remain firm at least until the winter slow down begins to bite. Depending on how marked that is we will either see a drop in raw material demand, and hence prices, or a drop in finished steel and aluminum output. Neither scenario being particularly positive for prices.

Just when life was getting good for Indian steelmakers, the price of coking coal goes up.

Free Download: The October 2016 MMI Report

The increasing price of global coking coal, a key ingredient in steelmaking, may squeeze Indian steelmakers’ profitability and deepen financial risks, according to a Fitch Ratings report. Prices had crossed the $190-a-metric-ton mark recently. The steel companies risk will also increase if the high prices persist while domestic steel demand growth remains low. Which essentially means that the increase in raw material costs for Indian steel producers may shrink their margins, if the rise is not passed on to consumers.

Coking Coal Imports

The bulk of India’s coking coal is imported to compensate for the lack of good quality coal from the country’s own mines. In addition to steel plants, the raw material used by coal-based power plants, cement plants, captive power plants, sponge iron plants, and almost all depend on importing non-coking coal.

Coke is imported mainly by pig-iron manufacturers and iron and steel sector consumers using mini-blast furnaces. India imported around 200 million mt of coal last financial year to top domestic production of 640 mmt.

Steel mills Molten iron smelting furnace production line

Steel mills in India are turning to new suppliers and reopened mines to provide coking coal with prices up. Source: AdobeStock/zjk.

So India, despite efforts by the government to reduce its dependence on foreign coking coal, has to import it from countries like Indonesia, South Africa, Russia and Australia. Coking coal prices in Australia have surged in the last few months, so what’s good news for that nation is bad news for India’s steel makers. (more…)