HIGHLIGHTS
Steel’s role in industrialization makes cutting output a challenge
More M&A will help lift overall quality of steel sector
Blast furnaces will continue to dominate despite EAF focus
Singapore — S&P Global Platts Analytics expects a number of carbon emissions-related policy changes to China’s steel industry to be announced during China’s National People’s Congress and Chinese People’s Political Consultative Conference, or the Two Sessions, starting in Beijing on March 4.
As the iron and steel industry is a major carbon emitter, it will no doubt be targeted for carbon emissions reduction in 2021. However, China is still in the process of industrialization, which means its economic development will continue to be steel-intensive for many years to come.
Platts expects that to achieve carbon neutrality by 2060, a series of policy changes comprising steel production reduction, steel export rebate cuts, the increase of scrap utilization, development of electric arc furnaces, as well as the establishment of a carbon emissions quota trade, are likely to be announced during or shortly after the NPC and CPPCC.
A national carbon emissions quota trading market has been mooted for the end of June.
Steel production cuts
China’s Ministry of Industry and Information Technology has cited the plan to cut steel output no less than three times already in 2021 as the most effective way to reduce emissions. But this could hurt the profitability of steel end-users, or even drive up inflation. This is because steel demand is expected to continue rising modestly in 2021, so any year-on-year steel output decline could trigger a sharp rise in steel prices.
Platts Analytics expects steel output cuts to occur in the second half of 2021, as demand is likely be lower in H2 than in H1. Implementation of emissions quotas could be a way to enforce production cuts if emissions quotas allocated to mills are exceeded.
The Ministry of Ecology and Environment is taking the lead in setting carbon emissions quotas and a trading mechanism. Some mill sources said setting emission quotas for hundreds of steel mills is complex, and it remained unclear when more details will be announced. If steel output cuts began to hurt downstream users, they could be loosened or lifted.
Reducing steel export rebates
Export rate reductions could occur later this year to discourage exports and indirectly steel production. But cutting export rebates by too much and too quickly will hurt steel industry profitability. The average profit margin for China Iron & Steel Association members was 4.4% in 2020, down from 4.6% in 2019.
A likely scenario could see rebates reduced for comparatively low-end steel products, such as long steel and hot-rolled coil, from 13% to 9%, while high-end products, like cold-rolled coil and hot-dip galvanized coil, remain unchanged at 13%.
Increasing scrap utilization
This strategy is expected to be reiterated during the Two Sessions. But to establish a mature scrap supply chain is likely to take another two to three years, while electricity shortages will continue to hold back the development of electric arc furnaces or EAFs.
China plans to increase its domestic scrap supply to around 300 million mt/year by 2025, up from 240 million mt/year in 2019, meaning the increase of scrap supply is only about 10 million mt/year over 2020-2025.
Scrap imports may amount to just a few million mt in 2021, as recovering overseas demand for scrap has already pushed up overseas scrap prices.
Platts Analytics forecasts that China’s net EAF capacity expansion will be about 13.3 million mt/year in 2021, taking the country’s total EAF capacity to about 196 million mt/year by the end of 2021. This would account for 15% of China’s total crude steel capacity. However, the net expansion will slow down after 2021 to probably just 7 million mt/year in total over 2022-2024.
Platts Analytics believes blast furnaces and converters will remain the main route to making iron and steel, with EAFs a supplement. However, gradually increasing scrap supply will help to increase scrap utilization rates in converters. The scrap ratio in Chinese converters can be boosted to as high as 20%-30%, while the ratio surveyed by Platts in Q4 2020 averaged 18%.
Accelerating M&A
M&A should receive more supportive policies as consolidation of the industry will contribute to the synergies of carbon emissions reduction, and help the steel industry have a bigger say in price settlement with raw material suppliers as well as downstream steel users. Leading steel mills are expected to further increase their market shares in 2021 and onwards.
Baowu Group produced 115 million mt of crude steel in 2020, up 21% year on year, through acquiring Taiyuan Iron & Steel. Baowu’s crude steel output in 2020 accounted for 10.9% of China’s total crude steel output, up from 9.6% in 2019.
Meanwhile, the crude steel output of the biggest three privately-owned steel mills totaled 106 million mt in 2020, accounting for 10% of China’s total output, up from 9% in 2019.
No GDP growth target for 2021?
China may again set no GDP growth target for 2021 in a bid to focus on deleveraging its economy. That means China may stay hawkish to the property sector with tightened financing and home purchase restrictions, while its fiscal support to infrastructure is unlikely to surpass the level seen in 2020.
China’s new local government special bonds – a major support to some infrastructure projects – could decrease to Yuan 3.5 trillion ($541 billion) in 2021 from Yuan 3.75 trillion in 2020, some market participants believe.
Platts Analytics estimates an upper range scenario in the property sector would see the addition of just 6.07 million mt of steel compared with 2020, marking a 1.9% increase to 328.2 million mt. The lower range estimate sees a decrease of 8.68 million mt to 313.4 million mt, marking a 2.7% fall.
Post time: Mar-18-2021