Six-year high

China's steel mills run at full tilt as output hits new peak

Inside a Chinese steel mill
Inside a Chinese steel mill
Photo: AFP

(Bloomberg) Steel production in China chalked up a fresh monthly record as mills in the world’s top supplier increase output to profit from a rally in prices to six-year highs before government-ordered pollution curbs are implemented.

Crude steel output climbed to 74.59 million metric tonnes last month, surpassing the previous peak of 74.02 million in July, and up from 68.57 million in August 2016, according to the statistics bureau Thursday. While that’s an all-time high for the month, daily output was less than the record in June. Production surged 5.6% to 566.4 million tonnes in the first eight months, also a record.

Steel prices have been supercharged this year in the country that accounts for half of global output. A crackdown on illegal mills shuttered some supply, boosting the remaining producers, while demand has been underpinned by significant state-backed stimulus. Investors are also eyeing signals that the government will press ahead with anti-pollution curbs over winter.

"Steel mills have boosted output as profit margins are good," said Helen Lau, an analyst at Argonaut Securities (Asia) Ltd. in Hong Kong. "Production cuts won’t set in until September or October, so steelmakers are churning out as much as they can in the meantime."

A labourer works at a cold-rolling mill
A labourer works at a cold-rolling mill
Photo: Reuters

Spot reinforcement bar in China, a benchmark product used in construction, hit 4,396 yuan a ton early this month, the highest level since October 2011. Prices have gained 30 percent this year.

Steel output may drop in coming months as Asia’s top economy presses ahead with supply-side reforms. Hebei province, the centre of China’s mammoth steel industry, has plans that’ll allow for winter output cuts of as much as 50 percent to reduce pollution. Citigroup Inc. has estimated daily production could shrink 8 percent because of the environmental crackdown.

Clean-Air Push

Mills do have some alternatives, according to Barclays Plc. They include over-reporting idle capacity, which results in fewer operating plants being cut, and using more high-grade iron ore to boost yields, the bank said on August 29, predicting the clean-air push will only affect 2% of total production.

Ultimately, it boils down to profitability, as furnaces will keep producing if margins remain robust, according to Argonaut’s Lau. China’s steel output will probably rise to 841 million tons this year from 808 million in 2016, Lau said.

In contrast to steel, China cut aluminium production for a second month in August from a record as smelters shut plants amid a government campaign to eliminate illegal capacity. Primary output fell 1.7% on month to 2.64 million tonnes, and was down from 2.93 million in June, according to bureau data.

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