China has finalised plans to roll out wider and more intense steel production cuts between 15 November and 15 March 2022 compared with last year.
The country's Ministry of Industry and Information Technology (MIIT) has announced output restrictions, commonly referred to as autumn-winter production curbs, for steel enterprises at "2+26" cities. These include Beijing, Tianjin and some cities in Hebei, Shanxi, Shandong and Henan provinces.
The measures will be rolled out in two phases. Phase one from 15 November to 31 December calls for keeping 2021 steel output flat on the year. Phase two, which will be implemented from 1 January to 15 March 2022, calls on steel mills to reduce output by at least 30pc on the year. China divides its mills into four categories — A, B, C and D — from most to least environmentally compliant.
Steel mills in category A can voluntarily cut production but are required to keep output flat on the year. Those in categories B, C and D will be required to follow restriction ratios relevant to their category.
"The phase two production curbs are above expectations and will curb iron ore demand in the first quarter of 2022, dragging down prices," a Beijing trader said. China has made a routine of implementing steelmaking curbs during the autumn-winter season since the rollout of its 13th five-year economic plan in 2016 that focused on environmental protection. Curbs are more widespread and intense this time around as Beijing will host the Winter Olympics in February-March 2022.
The January 2022 iron ore futures contract on the Dalian Commodity Exchange closed at 731 yuan/t ($113/t) today, down by 5.92pc.
The production reduction in phase two may lead to a decrease of 380,000 t/d in crude steel output, according to estimates from a futures company. Output during the same period of 2021 was 3.01mn t/d. China produced 1.065bn t of steel in 2020. Output rose by 11.8pc on the year to 563.3mn t during January-June, leading to stricter curbs in the second half of the year.
China's steel output cuts have implications for the entire ferrous complex. Prices of seaborne iron ore have dropped by 40pc since May. The Argus 62pc index averaged $205.37/dmt in May when prices hit a record high. The month-to-date average stands at $122.41/dmt. China needs to take more steps to curb unreasonable price increases for bulk commodities to prevent those costs from being passed on to consumers and ensure supply, Chinese premier Li Keqiang said in May.
Monthly domestic rebar prices have risen by 9.6pc from May-October, while hot-rolled coil prices have dropped by 2.07pc during the period. The support to steel prices from the output cuts has allowed mills to absorb record coking coal and metallurgical coke costs. The month-to-date average of the Argus premium low-vol cfr China index is at $600.89/t, up by 135pc from the May average. China's ferrous scrap imports have remained subdued on the domestic steel output cuts. The country's push to decarbonise has facilitated demand for imported billets and that, in turn, has underlined demand for ferrous scrap among overseas buyers.
