How will the Implementation of Crude Steel Output Cut Policy Affect the Demand for Iron Ore?

SHANGHAI, May 11 (SMM) - 1. Release of crude steel output cut policy

Since the Ministry of Industry and Information Technology proposed to reduce crude steel production in December 2020, production reduction has been the focus of the steel industry. The crude steel reduction tasks in 2021 and 2022 were clearly proposed before April and have been successfully completed. In 2023, the media reported in April that relevant department plans to stabilise the crude steel output at 1.018 billion mt and make adjustment in the second half of the year according to the implementation situation. Specific policies still need to be focused.

In late April, some steel mills began to jointly reduce production due to the weakening profits. For example, the steel mills of Northwest United Iron and Steel and local major steel mills plan to reduce or stop production since April 25 and the output of pig iron will be reduced by more than 60,000 mt. The resumption time is to be determined. According to SMM research, the reduction in output did not meet the expectations.

On May 6, the Development and Reform Commission of Tangshan Fengnan District took the lead in issuing the Notice on Doing a Good Job of Crude Steel Production Reduction in 2023, requiring all steel mills to formulate reasonable annual production plans, increase the intensity of crude steel production reduction, and ensure that the output of crude steel shall not exceed that of last year. The output in Tangshan Fengnan District (2022) was 18.44 million mt, a decrease of 3.7% year on year. Although the output of crude steel in Fengnan only accounted for about 2% of the total output, more regions will issue relevant policies in the future.

2. Calculation of crude steel output cut under different scenarios

According to statistics from the Bureau of Statistics, in January-April 2023, China's crude steel output was 359 million mt, with daily output of 2.99 million mt. Since the output cut policy has not yet been clarified in the first quarter, the crude steel output of steel mills increases sharply in the first quarter amid rising capacity utilisation rate. And once the reduction policy is implemented in the fourth quarter, steel mills will stop or reduce production in order to achieve the targets.

 The crude steel daily output in May-December shall be reduced 10.2% so as to meet the target of keeping the full-year output the same as last year. And the daily output shall be reduced 12.5% to meet the target of cutting the output by 1.7%. In the two scenarios, the year-on-year output loss in May-December will be 3% and 5% respectively.

3 Impact on iron ore demand

At present, due to the slow recovery of downstream demand and the supply surplus caused by undetermined output cut policy, steel mills suffered serious losses. According to the China Iron and Steel Association, the profits of key steel companies in the first quarter fell 71.5% year-on-year. At the same time, the high raw material prices also encouraged steel mills to reduce the production.

In the case of crude steel output cut, the demand for pig iron and steel scrap will decline and the demand cut depends on their cost efficiency. In the short term, under the crude steel output cut target, BF-based steel mills will generally reduce the use of steel scrap due to the high costs of shutting down blast furnaces. At the same time, steel mills will also consider the cost efficiency of steel scrap and iron ore to make adjustments.

From January to April 2023, iron ore imports increased 8.6% year-on-year, while domestic ore output decreased 6.7%. The pig iron output increased 7.6% while the port inventories decreased.

It is estimated that from May to December 2023, the demand for pig iron will drop 3-5.5% year-on-year. Even with the sharp increase, the imports of iron ore in January to April were basically the same as that in 2021 and are expected to increase further by 1% in the future. The domestic ore supply is expected to increase 8.3%. Under the rising supply and falling demand, port inventories will increase and iron ore prices will decline.