Chinese maintenance trims 2.5mn t of steel

OREANDA-NEWS. July 14, 2015. Scheduled maintenance shutdowns in China's steel industry will suppress around 2.5mn t of production. But more cuts will be needed to support steel prices if they do not recover soon.

Although the scheduled shut-ins in July and August are not substantial — amounting to just 3pc of the two months' average output — mills are running on lean inventories, so the seasonal slowdown has weighed on spot demand and sentiment.

"The real shutdowns of steel mills are not that much right now, although they are rising," a Chinese mill iron ore trader said. "It is the expectation of more shutdowns that is dampening market sentiment."

Maintenance is planned in Fujian, Guizhou, Hebei, Inner Mongolia, Jiangsu, Jilin, Liaoning, Shandong, Shanxi, Tianjin and Yunnan for crude steel and steel products, such as wire rod, rebar and plate.

"What is uncertain with around 2mn t being curbed, is how much of that total is because of weak demand and how much is because of maintenance," a Singapore-based analyst said. Mills traditionally schedule maintenance in the hotter summer months in China, but with margins under pressure and demand limited, there could be further cuts this summer, he said.

China's steel market is so fragmented that mills face a "prisoners' dilemma" of looking out for their own interests rather than co-operate with other mills to rationalise production. "No-one wants to make the plunge themselves," the Chinese trader said.

Steelmakers' losses are mounting. "Steel mills that produce strips in the Tangshan area are losing 300-400 yuan/t (\\$48-64/t). Billet production costs are around Yn1900/t — losing nearly Yn200/t," a Singapore-based iron ore trader said.

Mills are concerned that in the second half of this year exporting billet will get tougher and there will be less domestic demand, he said.

Chinese billet prices have fallen back towards \\$285-290/t fob and with domestic demand slowing seasonally, deeper production cuts are needed to shore up prices, steel traders said.

"I do not see a better market because the output cuts are too small to support a market rebound," a Shanghai-based steel trader said.

"Most mills are just conducting maintenance and have so far not moved to cut production. If the losses keep growing and downstream demand worsens, more mills will have to cut their production," the Singapore based iron ore trader said.