Beijing September 30 2021: China's steelmaking industry is facing disruption from widespread power rationing, with production of long steel currently more impacted than flat steel -- but a much wider impact on manufacturing is set to rapidly squeeze demand for flat steel in the near term, as per S&P Global.
The country's power crunch has rippled across provinces and regions due to a shortage of thermal coal-generated electricity supply and tightening energy consumption targets.
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China introduced the energy targets in early 2021 as part of plans to achieve ambitious carbon goals, which include hitting peak carbon emissions by 2030.
After missing the targets in the first half of the year, 18 provinces and regions are now enforcing power rationing, impacting both steel production and demand.
The curbs are impacting steel mills in 12 of those 18 provinces or regions, including Heilongjiang, Inner Mongolia, Shandong, Jiangsu, Zhejiang, Sichuan, Guizhou, Yunnan, Guangdong and Guangxi, according to mill sources and traders.
As a result, the combined daily crude steel output in these areas is expected to drop by more than 140,000 mt/day from the level seen in mid-September, according to S&P Global Platts calculations based on data from mill sources and traders.
China's daily crude steel output averaged 2.623 million mt/day over Sept. 1-20, down 2% from August and 15% lower on the year, according to the China Iron & Steel Association.
Jiangsu, which has enforced power rationing for industrial users, has seen the biggest impact on crude steel output, with production down by at least 50,000 mt/day from mid-September. Jiangsu is China's second-largest steelmaking province after Hebei.
Hebei is also imposing power cuts, but the direct impact on steel output is more limited.
Mills in Hebei, especially those in the cities of Tangshan and Handan, had already implemented steel output cuts of around 30% for the third quarter in order to meet the province's annual output goal and may not be required to further trim production due to power curbs, mill sources said.
Hebei is seeking to reduce its 2021 crude steel output by 21.7 million mt year on year to 228.07 million mt.
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Downstream users face heat
To date, the power cuts have mostly affected long steel mills, which are either electric arc furnace or small integrated steel mills, while flat steel producers have faced an output reduction of only around 20% in the 12 provinces or regions.
However, the power cuts across all 18 provinces or regions have significantly impacted the manufacturing sector, a major consumer of flat steel.
Some manufacturers currently can only operate normally for two to three days a week and produce only during off-peak hours, mostly at night, on other days, some mill sources and traders in eastern and southern China said.
"Order bookings for flat steel from clients for home appliances, auto parts and some other machinery have shrunk fast in September due to power cuts at these end-users," one mill source in eastern China said, adding his company was finding it difficult to raise prices of flat steel even though it has cut crude steel production by one-third in September.
Major steelmakers unaffected
It remains unclear when power rationing will ease in China.
Manufacturers could continue to face power curbs into winter, while crude steel output was expected to rebound in late November or December, according to market participants.
China has been asking steel mills to curtail production since July to keep their 2021 annual output below 2020 levels. The move is also seen in line with China's overall carbon goals.
Most major integrated steel mills, which have their own power plants and are unaffected by power shortages, are expected to complete their output cut requirements by November and return to normal production levels in December, according to mill sources in northern and eastern China.
Limited upside room
China's flat steel prices are likely to come under pressure in October as the decline in demand has outpaced that of production, and the long steel market will continue to outperform the flat steel market in October, according to market sources.
However, traders were cautious about the upside room for long steel prices, saying a slowing property sector and lackluster infrastructure construction would continue to weigh on construction steel demand.
Chinese property developer Evergrande Group's default on loans could spark a domino effect in China's property sector, leading to lower steel prices in Q4, according to Platts Analytics.
China's domestic rebar and hot rolled coil sales margins stood at $140/mt and $132/mt, respectively, Sept. 27, according to Platts Analytics. Spot rebar and HRC prices in eastern China were around Yuan 5,750/mt ($891/mt) and Yuan 5,700/mt in late September, according to Platts data.