The local government in Tangshan announced on Friday that it is planning to extend steel production restrictions well beyond the current winter heating season. We understand that the plan is yet to be approved by the authorities, however, if implemented it will delay the lifting of the output cap from March 15 to mid-November. Tangshan is one of the largest steel producing regions in China with an estimated annual production capacity of about 104 million tonnes.
Iron ore and steel futures surged following the news with March contracts rising by 1.3%* and 4.1%** respectively. If maintained, the rising spread between steel and iron ore prices could boost mills’ margins in coming weeks.
Steel makers’ profits remained exceptionally strong throughout 2017 but softened significantly over the last two months, dropping from about RMB 920 per tonne in late Nov-17 to about RMB 490 by the end of January this year. The sharp drop in mills’ profits was partly due to rising input costs towards the end of the year and partly due to seasonality. However, steel profits and demand remain in rude health when adjusted for seasonal factors. January’s average steel margins are about 81% higher compared to the same period last year whereas implied steel consumption is up by 5.8% year-on-year, from 57.3 million tonnes to 60.6 million tonnes, a 4-year high for the month.
Improving margins are likely to boost demand for high grade iron ore and support imports. High quality material not only yields higher output but also is less pollutant and favoured by steel mills when margins are healthy. Premiums are already increasing with the spread between 65% and 62% Fe iron ore rising from $2.3 per tonne in early January to over $6.5 per tonne recently. With strong demand and improving margins we expect demand for high grade iron ore and imports to rise further in coming weeks.
Sources:Arrow
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