Steel Price Rally Continues as China Steps Up Production Cuts

18 January 2017

Steel prices in China have continued their lofty advance, with the upside coming from the country’s announcement that it will further cut its steel capacity in 2017. Shanghai steel prices climbed further this week, and are now up 16% year-to-date.

China plans to move forward with steel cuts in 2017, but this time they will push for actual output cuts and not just capacity cuts. They will also shutter production as part of their efforts to curb pollution. The government wants state-owned businesses to cut 6 million tons of steel production. Output of low-grade steel in small, polluting furnaces will be eliminated by the end of June, and that could cut as much as 4% off of China’s steel output.

While China cut steel capacity in 2016, steel output actually rose 1.1% in the first eleven months of the year compared to the same period in a year prior. Through the year the country cut 45 million tons of capacity while increasing output. The rate of output growth has been accelerating recently, likely as steel makers are incentivized to keep producing due to the higher steel prices. Steel prices, in turn, are being supported by increased demand from China’s infrastructure development programs.

There were concerns that steel prices would fall in 2017 as China’s infrastructure spending programs wind down while concerns of a real estate market slowdown supported expectations for downside. While concerns remain over China’s economic growth, as the country pushes forward and now directly cuts steel output there is reason to believe that the rally could last a little longer than previous forecasts. How exactly this unfolds; however, is yet to be seen. A challenge for Chinese steel producers is the protectionist measures being implemented against exports. The US has imposed multiple tariffs and duties, as high as 500%, on certain imported Chinese steel products. There are other trade suits pending against China, and as the country finds it more expensive to export it will have to rely on domestic demand for more of its steel products.