China's Steel Utilization Rate Falls to 73% in Q2, from 77% in Q1

SINGAPORE, July 21 -- China's utilization rate of its steel refining capacity averaged 73.1% in the April-June quarter, down from 77% in January-March, latest data from the National Bureau of Statistics showed.

    While a year-on-year comparison was not immediately available, the country's utilization rate was 75.83% in full-year 2008, having remained above 80% from 2001 to 2007, reaching a peak of 92.35% in 2002.

    Shenzen-based analyst Liu Bing from First Capital Securities said the utilization rate for both quarters of 2009 to date was "considered higher than expected" given the steep fall in steel prices in late 2008-early 2009.

    He attributed this to a loose credit environment, which enabled many state-owned mills to run at a loss.

    "This is also the reason that the potential for improvement in Q3 is limited," he said.  

    However, he still forecast an improvement in the rate for Q3 to around 80% due to broadly improving industry fundamentals in China.

    "The single biggest news last week was that the growth rate of new residential construction finally turned positive in June. If sustained, this will boost prices of construction steel products in the coming months," Liu  said. "The price of plate products like hot-rolled coils will also feel the pull, and steel mills will gear up production," he added.

    However, the risk of plate oversupply would cap the hike in rates, Liu added.

    "Large mills have lower utilization rates than the national average because these state-owned mills mainly produce plate products, whereas smaller private mills focus more on construction steel. And with construction steel prices in China being firm so far this year, these smaller mills now enjoy almost full utilization rates," Liu said.

    "Thus, overall utilization rates in Q3 won't be particularly high, with the drag from the large mills' lower utilization rates remaining for the rest of this year," Liu said.

    (Source: Platts)