Local steel associations in different provinces of China have been calling for reductions in steel production, trying to stop the significant price declines seen in past weeks due to slower-than-expected demand, poor-to-negative margins, and high inventories at mills, according to official statements and local media reports.
The Yunnan Iron and Steel Association issued its steel production restriction plan on March 7 with the aim of decreasing construction steel production by 500,000 mt per month (which is equal to over 40 percent of the average monthly output). Following this, on March 14 the iron and steel associations of Guandong and Shandong provinces also issued production suspension plans.
In Guandong Province, production capacity utilization rate cuts of 40 percent are being implemented at Baowu Zhongnan, Zhuhai Yue Steel and Jingye, with one blast furnace at each mill going for maintenance. At Yangchun New Steel the production reduction target is 50 percent, at Guangdong Guixin it is 45 percent and at Jin Shenglan the reduced production time will lead to a decline of 20 percent in output.
Due to the sharp falls in profits of over 200 Chinese steel producers, they have been cutting capacity utilization rates, which have been at 75.6 percent in the middle of March in the abovementioned three provinces, while in good market conditions mills may work at over 90 percent capacity.
The steel production cuts are expected to halt the continuous downtrend in the steel markets seen after the Lunar New Year holiday. High inventories were the main signal that steel demand has failed to improve as expected and, with high supply, the situation in the market has only been worsening since mid-February. On March 10, overall domestic inventories of the five main finished steel products in 21 major cities in China totaled 14.22 million mt, according to CISA, up 550,000 mt or four percent compared to February 29. But if to compared with early February, the stocks of these major products surged by 33 percent or 4.66 million mt.
“Sentiments have improved with more steel associations declaring firm plans to cut capacity [utilization rates] as uncontrolled price falls are not healthy for the whole industry. Steel futures finally closed RMB 20/mt higher and physical prices may be better with improved the trade volume, such as that for debar which has increased by 40 percent,” a Chinese trader said. Rebar and HRC futures prices at the Shanghai Futures Exchange have gained 0.26 percent and 0.7 percent since Friday.
“The price will be trying to rise, but I don't think the price will go up much, at least this month. So, for March, it will remain at a low level, but definitely a further fall is killing the mills,” a representative of a Chinese mill, which is among the producers that have started to cut production, commented to SteelOrbis.