China decides on winter production restrictions

It will apply to 26 urban areas located in Beijing, Tianjin and Hebei, Shandong, Shanxi and Hunan provinces, accounting for just over 40% of the country's steel production in 2020.

In the period from November 15 to December 31, 2021, metallurgical companies in these regions will have to reduce their steel production so that the national figure for the whole of 2021 does not exceed 1,064.8 million tons last year.

In the first three quarters of 2021, China produced 21.36 million tons more steel than in the same period of the previous year. This means that production in the fourth quarter should be reduced by at least this amount to a maximum of 254.03 million tons or an average of 84.35 million tons per month compared to October-December 2020.

Given the drop in production to 73.75 million tons in September and the ongoing problems with the power supply of metallurgical enterprises, this means that this task will not only be fulfilled, but also over-executed. At least, according to consulting firm Mysteel, in mid-October, the average utilization rate of Chinese mini-factories was only 48.55%, which is only 0.8 percentage points. It exceeded the figure on 7 October.

Metallurgical firms, which are subject to restrictions after the New Year and until March 15, are required to reduce their steel production by at least 30% compared to the same period of 2020. According to SMM calculations, this means about 33.4 million tons of losses. Calculation for products based on first quarter 2022 results or 12.4% of production volume in January-March 2020.

The directive also states that the reduction in melting must be accomplished by stopping the relevant sections for blast furnaces and the preparation of raw materials. At the same time, cuts in electricity supply in recent years are forcing Chinese metallurgists to take their rolling mills out of service first and foremost. The measures announced by the two ministries are therefore aimed at achieving a market equilibrium between semi-finished and finished products.

According to SMM's forecasts, such a significant decrease in steel and rolled product production will not lead to a significant increase in steel product prices in China as demand will be similarly weak in the coming months.