China’s steel clampdown gives domestic producers a leg-up

Source: LIVE MINT

Domestic steel producers should be happy at China’s Tangshan city’s decision to continue curbs on steel output. Winter curbs on output in this key steel-producing city were to end in mid-March but have now been extended till mid-November. This signals a tighter supply situation when demand is expected to pick up, after a lull due to winter and holidays in China.

Tangshan is part of the Hebei province which produced 191 million tonnes (mt) of crude steel in 2017, nearly 20% of China’s total steel output, according to Reuters. The city contributed to over half of Hebei’s output. Its decision to continue with curbs also indicates China’s continuing resolve to keep steel output in check. Improving air quality is one objective as also the need to quell criticism that excess steel output in China is adversely affecting steel producers elsewhere in the developed world.

Chinese steel and iron ore prices have risen this week on this news. The impact on steel is understandable, as a tighter supply situation when demand should increase signals higher prices. For iron ore, it can cut both ways. Lower Chinese steel output means lower requirement for iron ore. However, a trend noticed last year was companies buying higher quality iron ore to stay within pollution limits. That led to higher prices for quality iron ore. Higher ore prices in turn set a floor for steel prices.

Where do Indian steel producers fit in? Major steel producers have been doing well, on the back of rising steel prices and completed capacity additions. The prospect of domestic steel prices staying firm in fiscal year 2019 has improved after China’s decision. Also, India has turned a net exporter of steel, meaning it benefits directly from rising global prices. In April-January 2018, India’s imports of finished steel rose by 5.5% to 6.4 mt whereas exports rose by 40.2% to 8.2 mt.

Recent data shows that global crude steel output rose by 0.8% in January over a year ago, with China’s output estimated to have declined by 0.9%. The next few months will give a clearer picture if output increases trend low.

There is one risk to the brightening steel picture. The US may impose higher duties on steel imports in a bid to give an edge to domestic steel output. That can put prices under pressure as it can upset the global demand-supply balance. That can then, potentially, undo some of the good that will come from China keeping a lid on steel output.

Source: LIVEMINT