China pushes for lower energy consumption and carbon emissions with steel production cuts

The Fujian provincial government issued a notice to local steel mills on June 18 stating that it will enforce crude steel production cuts between June and December this year, with output not to exceed an annual capacity of 35.98 million tonnes.

Crude steel output will be no higher than 30.58 million tonnes in 2024, according to the notice.

Fujian province, in southeastern China, produced 34.06 million tonnes of crude steel in 2023, ranking it tenth among the leading steel production hubs in China.

Output in the first five months of 2024 was about 14.64 million tonnes, up 23% year on year, according to data from the National Bureau of Statistics (NBS).

If the policy is implemented, crude steel production in 2024 will be 3.48 million tonnes lower than the previous year.

The most-affected steel mills will be those running blast furnaces (BFs) because of their high carbon emissions, according to market participants.

Electric-arc furnaces (EAFs) will be prioritized to ensure good production rates, according to the notice.

Production cuts considered by other Chinese provinces

Other larger production hubs, such as Shandong and Hebei provinces, published notices about reducing energy consumption and carbon emissions, and containing crude steel production early in 2024, but did not specify by how much production will reduce.

One trader based in Shanghai told Fastmarkets that production targets in Hebei province are expected to be lower than the annual production volumes in 2022, which were significantly lower than those in 2023.

“There is going to be stronger pressure on supply reduction in the second half of the year, given the tighter production targets,” an iron ore trader based in Beijing said. “Nonetheless, first-half 2024 production volumes have not been very high, so steelmakers technically have some flexibility in planning their production schedules.”

Magnitude of cut matters

“We are hearing some production-cut plans for the year [across Chinese regions], but the size of the cuts [for the whole country] remains unknown,” a steel industry analyst based in Hangzhou told Fastmarkets.

According to recent market speculation, the cuts could amount to around 20 million tonnes, according to the Hangzhou-based analyst. This compares with China’s 1.02 billion tonnes of crude steel output in 2023, so is unlikely to boost the steel market in the second half of the year.

But a production cut of just over 20 million tonnes is likely to hit prices of key steelmaking raw material iron ore. As a result, lower iron ore prices could pull prices for finished steel lower.

A larger cut – potentially doubled to 40 million tonnes – would flip the finished steel market into short supply. This would push prices for both steel and raw materials higher, according to the analyst.

But no matter the scale of the production cut, hot-rolled coil prices are likely to benefit because Hebei province, which is China’s biggest steel-producing province and accounts for the lion’s share of HRC capacity, will take a lead in reducing production, the Hangzhou-based analyst noted.

“HRC demand is less susceptible to seasonal factors. Besides, demand [for the flat steel product] is set to be underpinned by exports and a potential pick-up in infrastructure construction [following Beijing’s stimulus measures] in the remainder of the year, the analyst said.

“Resilient demand, coupled with a possible supply cut, will lower HRC inventories in the third quarter of the year and bolster prices in the second half of the year,” the analyst added.

Opinions in iron ore market divided

Most iron ore market participants adopted a wait-and-see attitude towards the news of Fujian province’s crude steel cut regulations, due to the lack of official announcements from other larger steelmaking hubs in China.

“The crude steel cut target started from Fujian province because its production in 2023 increased the most – up by 13.7% – and the 2024 crude steel cut amount as announced [for Fujian province] is actually a bit high,” a Beijing-based mill said.

Some market sources suggested that further crude steel production cut targets are likely to come from provinces that recorded relatively high year-on-year increases in production last year.

In 2023, the crude steel output in 11 provinces across China increased from the previous year by more than 500,000 tonnes per province. The largest volume increases were above 1 million tonnes per province, notably from Fujian, Inner Mongolia, Jiangsu, Anhui and Guangdong, according to NBS data.

Sentiment among market participants was not overly bearish in the iron ore derivatives market, despite expectations that the crude steel production cuts in the second half of the year would dampen iron ore demand.

“There hasn’t been any official file about crude steel target in Hebei province, or other large provinces. Most industry sources would prefer to wait for more announcements,” one mill source from Jiangsu province told Fastmarkets.

A Singapore-based trader noted that a few steel mills in Hebei province were heard to be conducting BF maintenance plans, while a large mill in Jiangsu province was maintaining normal production.

“The expected crude steel cut might be higher than the market expects given the Chinese government’s pressure from the decarbonization targets and continuous weak steelmaking margins in China,” the Singapore trader added.

“But in the short term, market participants will buy the crude steel cut story only when actual output starts to decline continuously,” a Shanghai-based analyst told Fastmarkets.

In May, China’s production of crude steel was 92.86 million tonnes, a year-on-year rise of 2.7% and the highest level since March 2023 when it was 95.73 million tonnes, according to the data from NBS.

In the first five months of 2024, China’s crude steel production totaled 438.61 million tonnes, down by 1.4% year on year.

Impact on coking coal market hard to predict in short term

Coking coal market participants suggested that the impact on the coking coal market was hard to predict at present.

“Currently, I don’t see any obvious impact in the near term,” one international trader based in Southern China told Fastmarkets.

“We originally expected the Chinese domestic coking coal market not to be strong in 2024 because of the abundant supply of the domestic and seaborne coking coal resource,” a trader based in Northern China said.

“Giving the situation that only Fujian province has set the goal [to cut crude steel production], it’s hard to predict any impact on the coking coal market without seeing other provinces that are production hubs of crude steel, such as Hebei and Shandong, set a goal ,” the Northern China-based trader source added.

Weaker H2 iron ore price outlook

The stricter production controls over steelmaking are expected to weigh on the raw material consumption of Chinese steelmakers, according to a trader in Xiamen.

Iron ore prices are likely to come under pressure from the weaker demand and it is anticipated that imports from Australia and Brazil will be higher toward the second half of the year.

“Iron ore inventories are at a two-year high with more cargoes expected to make landfall in the third quarter in line with an uptick in shipments from Australia,” a Singapore-based iron ore trader said. “A supply glut could crimp any potential upside in prices amid weaker consumption in the domestic portside market.”

Impact on ferro-alloys

Fujian’s steel production cut announcement will undoubtedly impose strain on Chinese steel demand and, in turn, negatively affect the upstream ferro-silicon market, according to market sources.

Ferro-silicon is mainly used in crude steel and magnesium production.

“The crude steel production decrease in 2024, not only in Fujian province but also other provinces, will make downstream steel buyers quite unlikely to make high offers to upstream ferro-alloys including ferro-silicon given the downward market,” one China-based ferro-silicon source told Fastmarkets.

“Maybe other provinces will release their own crude steel production cut plans later, which will further undermine the upstream ferro-silicon market participants’ confidence,” the source added.

“To my knowledge, domestic steel mills in China have already struggled with making low profits, and under these circumstances, many steel mills made cautious purchases on ferro-silicon. If there are more crude steel production cuts in other provinces, this could make ferro-silicon purchases even more watchful,” a second China-based ferro-silicon source said.

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