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China’s steel production continues to surprise

Chinese government warning could cap steel prices in the near term

China’s steel production continues to surprise on the upside, with Apr’21 production at 97.8mt (highest ever), despite production curbs in the key hub of Tangshan. Given highersteel prices, producers in other regions have ramped up output to meet the current strong demand (apparent steel consumption in China was 91mt in Apr’21, implying a two-year CAGR of 7%).

Continuing high steel production and inventory levels (~20% higher than two years back) could pose a risk to Chinese and regional steel prices, if exports decline, as the rebates have now been removed by the Chinese government.

Moreover, Chinese authorities have recently expressed concerns over higher commodity prices and have warned of strict action against any manipulation in steel prices. This has led to a decline of ~7% in Chinese domestic HRC price in the last two trading days. Indian HRC price, however, is trading at a discount of ~20% to import parity, which should cushion against any potential weakness in regional prices.

China’s Apr’21 steel production at 97.8mt – its highest ever production

* Despite production curbs imposed in the Tangshan region, China’s Apr’21 crude steel production rose 15% YoY (two-year CAGR of 7.4%) to 97.8mt, its highest ever monthly production. During Jan-Apr’21, China’s crude steel production stood at 365mt, up 14.6% YoY (two-year CAGR of 7.6%, Exhibit 1).

* China’s apparent steel consumption (production + imports - exports) rose 14.2% YoY (two-year CAGR of 7%) to 91.1mt in Apr’21. During Jan-Apr’21, steel consumption rose 13.9% YoY (two-year CAGR of 7.9%) to 344mt. (Exhibit 2)

* China monthly steel exports rose 26% YoY (6% MoM) to 7.98mt in Apr’21, the highest since Dec’16 (Exhibit 3). Over Jan-Apr’21, China steel exports were up 26% YoY to 25.6mt. China’s steel exports, as a percentage of steel production,stood ~8.1% and 7% during Apr’21 and Jan-Apr’21, respectively.

* China’s Passenger Car sales grew ~10.9% YoY to 1.7m units (up 8% v/s Apr’19, Exhibit 4).

China steel prices correct from highs fearing government action

* China’s domestic steel prices have corrected by ~7% in the last two days as Chinese authorities summoned manufactures to discuss rising prices and vowed strict action against price manipulation.

* The summons came after China’s domestic HRC-rebar prices surged 17-22% WoW last week to USD1,041-980/t post the Labor day holidays.

* Post the correction, HRC-rebar spot prices stand at USD968-911/t, down 7% from the peak (Exhibit 5).

* Increase in iron ore prices (USD218/t, up 18% MTD) has offset the higher steel price benefit, leading to only a marginal increase in spot spreads. As a result, spot spreads for HRC-rebar stands at USD296-246/t (Exhibit 6, 7).

* Steel inventory (with traders in major cities) declined 19% MoM to 4.9mt (up 16% YoY, Exhibit 8).

* Regional steel exports are currently trading at USD1,050/USD1,060 per tonne FoB in Korea/China.

* Domestic steel prices are currently trading at INR66,750/t, a discount of ~19% to import prices (Exhibit 9).

* While we expect the discount to narrow once domestic demand improves, such a high discount would cushion against any correction in regional steel prices, owing to any possible action by Chinese authorities.

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