China’s mill margins soar on expectation of output cuts

China’s steel mill margins have reached their highest level since last December, supported by soaring finished steel prices and a slight softening of raw material input prices, S&P Global Platts data showed.

Market sentiment has been buoyed by expectations of tight steel supply due to key steelmaking hub Tangshan’s order to lower utilization rates by 25%-30% over the rest of this year in a bid to reduce pollution.

Domestic hot-rolled coil margins hit $79.66/mt on March 29, more than double the level at the start of the month and the highest since December 24, 2020.

Domestic rebar margins, which averaged minus $4.38/mt in February, hit a three-month high of $53.69/mt on March 29, Platts data showed.

Steel margins have been aided by 62% Fe iron ore prices softening in the second week of March, dropping $10-$15/mt from the mid-$170/mt CFR level seen at the start of the month.

Most respondents to the Platts Iron Ore & Steel Outlook for Q2 expected iron ore prices to range between $140/mt and $160/mt.

The question is how much of the buoyant steel price rally can be attributed to fundamentals and how to much to production cuts-induced sentiment.

The last time China imposed stringent steel output cuts was in the “winter heating season” of November 2017-March 2018, when utilization rates were rolled back by up to 50% in Hebei and other provinces.

Since then, environmental policies regarding steelmaking have tended to be more piecemeal and shorter-term, with more autonomy given to cities and provinces to implement measures. In many cases, the measures were not strictly enforced and the impact on overall steel production was fairly marginal.

Historical data showed domestic HRC prices rose by around Yuan 300/mt ($46/mt) when the output cuts were mooted in August 2017 and averaged Yuan 4,127/mt over September-March. Prices stayed around this level in the following six months once production had been restored. But 2017 was also impacted by China’s elimination of induction furnaces, which boosted steel prices.

News of the latest Tangshan cuts came when China’s steel market was already rallying, adding impetus to domestic flat steel prices that have risen by around $106/mt since the start of the year.

Traders have noted that tightened property policies and normalized monetary policies may limit end-users’ ability to continue absorbing higher prices. At the moment, prices are also supported by falling steel inventories.

The National Bureau of Statistics’ manufacturing purchasing managers’ index — due to be released on March 31 — will reveal the current state of manufacturing activity and whether it has improved after several lackluster monthly results.