China has handed the resurgent global steel industry an early boost for next year, with a clampdown on illegal mills that Citigroup Inc says could benefit the world’s biggest producers.

A campaign by China to shutter some induction furnaces, which use scrap as a raw material, may hit as much as 5% of the country’s output, bank analysts including Jack Shang and Tracy Liao wrote in a note received yesterday.

That’s raising prices for Chinese steel, and is poised to prop up iron ore and coking coal markets when blast furnaces ramp up to fill the gap, they said. That will boost steelmakers including ArcelorMittal, the world’s biggest.

“China is the largest exporter of steel in the world and Chinese export prices effectively put the floor under the global steel prices in our view,” the analysts wrote. The crackdown is “changing the investment case for global steel stocks, iron ore and coking coal,” according to the note.

The closures in four provinces show China is using an expanding toolbox of policies to restructure the world’s biggest steel industry after decades of growth.

Stricter environmental rules, and this direct action against illegal small producers, add to measures to cut capacity. At the same time, moves to stimulate growth in Asia’s biggest economy have benefited global steelmakers, with China’s exports poised to fall in 2016 for the first time in seven years.

Steel in Europe and the US could rise US$50 to US$80 a tonne in the next month if Chinese prices hold at current levels, Citigroup said. The price of benchmark hot rolled coil shipped from China has already jumped to US$530, the highest since 2013, according to Beijing Antaike Information Development Co.

Industry data for November shed an early light on how tighter restraints might play out next year, especially if this year’s resurgent demand is sustained. Run-rates at China’s steelmakers didn’t budge in November from October, even though prices were surging on a fresh bout of optimism for demand.

That’s a sign that environmental inspections which began in late-November were already having some impact, analyst Kevin Bai of CRU Group.

Citigroup singled the world’s No.1 producer ArcelorMittal as benefiting from the furnace shutdowns, because it sells iron ore and coking coal to third parties, as well as shipping steel. The firm’s value has surged 135% this year. The swing from scrap to mined raw materials could generate as much as 5 million tons a month of additional iron ore demand, and an extra 2 million tonnes of coking coal consumption, helping to prop up prices, Citigroup said.

“China has focused this year on the so-called zombie plants, but next year it’s going to target operational capacity,” Ren Zhuqian, chief analyst at consultancy Mysteel Research, said from Shanghai last week.

She said it’s possible that steel could follow the coal industry next year, with more direct government intervention.

“Supply-side reform has effectively lifted coal market sentiment this year and the market expects that to shift to the steel sector.”

 

Source:thestar.com.my

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