SHANGHAI, Jun. 7 (SMM) - Based on historical production data for cuts in output at Chinese steel mills, Steelease believes Chinese steel mills will begin cutting production in June, with cuts continuing for the next few months as well. The data points to future cuts from three key drivers.
1. The most powerful key driver is profit, which is determined by costs and output prices.
2. Government policies, such as energy conservation and emission reduction, and including monetary policies.
3. Equipment maintenance effects output, but Steelease considers this to be more of a reaction to the first two drivers and not necessarily a long-term output driver.
When analyzing steel utilization rates and average profits, Steelease finds the two are highly related.
Cuts in production are the result of two conditions, one is reactive, the other passive. The reactive act of lowering output is in response to declining profits or even losses, while a passive cut is determined by government policy. Short-term maintenance and the corresponding cut in output is a neutral response. Steelease believes there are two likely most probable conditions that affect current or mid-to-long term cuts in output.
First, in the absence of any new government policies, steel mills will not cut production in order to maintain current profits or at a minimum, positive cash flows.
Second, Steelease sources report new government policies from the China Banking Regulatory Commission (CBRC) will affect financing to steel traders. The CBRC will order commercial banks to strictly audit finances of steel traders, while the State-Owned Assets Supervision and Administration Commission (SASAC) will also order SOEs to halt financing services to steel traders, which means the major financing channels for steel traders will be closed. This will likely cause traders to destock, pushing steel prices down faster than production costs, with the indirect result of production cuts at steel mills in order to reduce losses.
Steelease believes capital for steel traders will become more difficult to acquire, and although new policies have not been confirmed, steel mills will preemptively cut production in the near future.