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Since early this year, due to multiple factors, some commodities have seen an extended price rally, with the China’s steel prices hitting records. For this reason, since May, the Chinese government has been ramping up measures to curb soaring prices in a bid to ensure market stability and discourage speculation and irregularities. Some abnormal market transactions such as price gouging and hoarding have been dealt with to the full extent of the law and brought to light.
China's Export steel prices trend (Jan 2020-May 2021)
The National Development and Reform Commission of China (NDRC), together with other relevant government departments, successively held meetings with leading associations and producers in the commodity industry, reminded that participants with the market influence in the sector to operate in accordance with laws and regulations, track trends in the market and maintain price stability. Consequently, China's steel market has gradually stabilized, with steel prices pulling back significantly.
China's domestic steel prices trend (Jan 2020-May 2021)
As one of the largest carbon emitters among all manufacturing sectors, China's steel industry accounts for about 13% of the country's total. In response to the national decarbonization campaign, some Chinese steel industry giants have rolled out carbon emission reduction plans, vowing to reach the peak carbon emissions by 2025 and cut emissions from the peak by 30% in 2030, five years ahead of the general peak carbon emissions target proposed in China’s 14th Five-Year Plan.
However, it will be hard for Chinese steel producers to cut production in the coming months because crude steel production from China climbed 13.9% Y-o-Y to 473.1 Mt for the first 5 months, a record high on the back of robust local demand and reasonable profit margins at mills, according to the latest data. It is estimated that China's crude steel output may exceed 1.13 billion tons in 2021, which means that this year's output may increase by 7.79% from 1.05 billion tons in 2020.
Source: Worldsteel - May 2021 Crude Steel Production Data
Owing to this, the Chinese government has introduced several initiatives to reduce steel output in order to mitigate any potential problems of overcapacity and ensure an annual output decline. This move will be the most direct way to achieve peak carbon emissions and carbon neutrality.
Thus, the pace of growth of China's steel production is expected to slow down as the government's strict containment measures are likely to keep China’s steel output growth under check in the second half of this year. Moreover, the expected production reduction plan will very likely support China’s domestic prices to remain firm in the H2 of 2021.
On April 28, China’s Ministry of Finance and State Taxation Administration jointly issued an announcement to remove the export tax rebate for most steel products from May 1, 2021. Prior to this adjustment, there were 166 kinds of steel products enjoying export tax rebates, while after this adjustment, the 13% VAT rebates of 146 steel products will no longer apply when exporting. Steel products with tax rebates to be retained after May 1 include cold-rolled alloy steel sheets, electro-galvanized sheets, hot-dip galvanized sheets, tin-plated sheets, galvanized sheets, and electrical steel. Among all hot-rolled products, only steel rails, wheels, and axles can still enjoy export tax rebates.
As China promises to substantially reduce carbon emissions from steel mills in the next few years, the cancellation of export tax rebates is conducive to reducing China's crude steel production and encourage Chinese steelmakers to give more priority to the local market.
However, as most cold-rolled and galvanized products still enjoy export tax rebates, the export volume has witnessed a significant increase in recent weeks. In order to balance steel prices and production, the Chinese government is very likely to further cancel export tax rebates for those products, and impose export tariffs for hot-rolled products, which will further support the further rise in China's steel export prices.
Relying on the government’s measures to curb soaring prices, while stabilizing the market in the short term, will be hard to solve fundamental issues in the long run. Since the global market is in a stage where over-expansion of the money supply leads to increasing inflation. However, directly control the prices will only have an immediate effect, while from a long-term perspective, despite great efforts by the government side, cooling global steel prices requires a joint international effort.
In terms of reducing crude steel output, there have been many rumours in the market, such as the implementation of production restrictions throughout the country and the reduction of crude steel output volume by 20 million tons or 25 million tons in the second half of the year. Notwithstanding rumours, the market generally expects that crude steel production will be strictly controlled, which will strongly support market sentiment and prices in the coming months.
The export tax rebate for cold-rolled and galvanized products is likely to be cancelled after mid-July because since the cancellation of the tax rebate for hot-rolled products, the market has abnormally seen cold-rolled prices lower than hot-rolled products. On this basis, the expected measures may lead to an increase in steel prices, and achieve the goal of reducing steel exports by the government’s efforts. Regarding the rumours of continuing to impose tariffs on hot-rolled products, it is unlikely to be implemented in the short term.
Collectively, all of these policy changes will benefit China in the short and long term, and we believe that
The current slight decline in steel prices is only a short-term trend, mainly due to the recent government's administrative control of steel prices, the hot and rainy weather from June to August- the traditional off-season in China’s steel market.
From the perspective of supply and demand, domestic and foreign demand is still strong driven by the gradual recovery of the global economy.
At the same time, the output on the supply side will be affected by the production reduction target and export tax rebate policies, which will eventually lead to a gradual rise in steel export prices in the second half of the year, and even record new highs.
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