Steel Unlikely to Recover on High Crude Steel Output

SHANGHAI, Aug. 21 (SMM) – Latest data from the China Iron & Steel Association (CISA) indicated the average daily crude steel output at China’s major medium and large-scaled steel enterprises was 1.6205 million mt during the first 10 days in August, up 0.82% from the level recorded during July 20-31. The average for all steel enterprises nationwide during the same period was estimated at 1.9699 million mt, up 1.05% compared with the previous 10 days. The CISA estimated the average daily crude steel output in July to be 1.967 million mt. The continued rise in crude steel output suggested production at China’s steel mills did not abate in August.

Steelease believes this round of decline in steel prices differs from the decreases in 2008 and 2011. For instance, rebar prices slumped more than RMB 1,600/mt in a short period from early September to mid-October in 2008, while raw materials, such as iron ore prices, were slow in responding to the sudden plunge of steel prices, causing steel mills to cut production so as to avoid losses resulted from the high-cost iron ore. By contrast, steel prices have been falling since April this year with the declines lasting for over four months and rebar prices only down some RMB 700/mt. The slow but continuous drops also drove down prices for raw materials, including iron ore and coke, meaning lowering costs for steel mills. In this situation, mills did show strong response to the gradual process of price slide, so massive production cuts did not occur.

In addition, steel mills have been required to maintain normal production to refrain from large amounts of layoffs, so as to keep the social peace with the approach of the 18th National People’s Congress. Some local governments introduced supporting policies including preferential loans for steel mills. This may also explain why mills did not experience extensive drops of production.

Steelease expects the staying high crude steel output will further lower steel prices given the unimproved demand downstream.