Chinese Steel Output on the Decline

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Chinese steel output is falling, according to The New York Times.

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Crude steel output hit 71.83 million metric tons in September, the lowest since February and down from 74.59 million tons in August, according to National Bureau of Statistics data last week. September’s average daily output was 2.39 million tons, down 0.8% from August (but still 5.3% higher than in 2016).

After a year in which mills have been cranking out every ton they can muster and prices have been booming on the back of plant closures, the recent fall in output is telling.

The cuts are being put down to an early cessation of production ahead of next month’s mandated winter heating season cuts on the grounds of improving air quality. Demand typically falls in the winter months, anyway, as construction slows in northern provinces — so the recent easing of rebar prices probably reflects both ample supply, despite production cutbacks, and a cooling construction market.

The New York Times quotes estimates that at least 30 million tons of China’s steel output may be lost during the four-month period (or nearly 4% of last year’s production). But some think that number could be bigger with Xia Junyan, an investment manager at Hangzhou CIEC Trading Co in Shanghai, quoted as estimating crude steel output could drop as much as 40 million tons between November and March.

Meanwhile, much the same appears to be happening in the aluminum market.

China’s aluminum output fell for a third straight month in September, according to Reuters, quoting official data, saying the country produced 2.61 million tons last month. That total is down 1.1% from the 2.64 million tons in August and 5.6% from the 2.751 million tons produced in September 2016.

Like steel, there have been a significant number of idled plants permanently closed and also of “illegal” or unpermitted plants closed, consolidating production under the control of state and larger private producers.

What is not clear is how much of the idled capacity may come back next year after the end of the winter heating season.

Some has undoubtedly been closed for good, but several producers have undertaken upgrading of facilities to meet stricter environmental standards. Others have applied for permits they originally did not have or have closed older plants with investment going into new state-of-the-art production capacity.

Although enforced closures and temporary idling of steel and aluminum plants for the winter heating period will reduce output for this year, it is not clear whether total output will be lower in the spring of next year or whether much of this capacity will gradually come back online.

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History suggests if demand is there and a profit can be made, mills will find a way around tighter controls to bring capacity back or build new plants. Lower output now does not necessarily signal a long-term shortage of supply in China; the market has a long track record of creating capacity to meet demand, real or perceived.

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