SHANGHAI, Nov 28 (SMM) – While rebar enjoys convincingly higher profit margins over hot-rolled coil (HRC) in a rising market, Chinese steelmakers will limitedly cut HRC production and shift to rebar in the coming month given capacity constraints and demand outlook pessimism for the construction steel.

Recent gains in spot steel prices have improved profit margins across Chinese steelmakers, prompting them to step up production.

With prices on a tear this month, spot HRC prices gained about 200 yuan/mt, while rebar prices jumped some 500 yuan/mt.

As of November 27, blast furnace steelmakers could see gross profit margins of around 400 yuan/mt on HRC, marking a 500 yuan/mt spread with margins of 900 yuan/mt on rebar, according to SMM calculations. Such rebar-HRC profit spreads are typically wide enough to drive steelmakers to curtail HRC production and grow rebar production.

However, it looks set not to see a significant production shift at the moment, as steel mills’ existing rebar production lines are already operating near full capacity and demand for the construction steel is expected to weaken amid increasingly colder weather.

An SMM survey showed that a production shift to rebar is expected to affect HRC production by about 80,000 mt in December, accounting for just 0.92% of HRC capacity. This is unlikely to deter HRC production from growing in the month ahead.

Rizhao Steel in east China’s Shandong plans to move about 10,000 mt of its molten iron to rebar production next month, wiping out 10,000 mt of HRC output, while Sichuan’s Panzhihua Iron and Steel will lift rebar production to 90,000 mt for December, up from an originally planned 80,000 mt, and lower HRC output by 10,000 mt.

Jiangsu Shagang said that both its rebar and HRC production lines are operating at full capacity, and could hardly adjust the production.

A HRC production cut of 50,000 mt, meanwhile, is planned for next month by Tangshan Iron and Steel, who failed to operate at full capacity under environmental restrictions, as it will ramp up rebar production after it did so this month.

Expanding supply and faltering demand are set to weigh on spot HRC prices in December.