Has China's Steel Output Peaked?
Is this as good as it will get for Chinese steel mill demand, and in turn for the prices of iron ore, coking coal and the return of the commodity price boom?
November’s production data for crude steel output could very well be telling us that 2017 will be a tougher year than the surprisingly frothy closing months of 2016.
Analysts made a big thing of the 5% jump in crude steel production, to 66.29 million tonnes in China last month from November 2015.
Reuters and other pointed out the 5% rise year on year in November was the fastest growth in output for two years, but there was an easy explanation for that.
The November 2015 figure of 63.15 million tonnes was the lowest monthly figure in the year outside of February when crude steel production fell to 61.9 million tonnes because of the impact of the Lunar New Year.
If you average output across January (more than 68 million tonnes) you get a monthly figure of around 65 million tonnes. That’s not far short of November 2015’s figure.
The 66.29 million tonnes for last month was down noticeably from the near record 68.51 million tonnes in October and the lowest since the weak figures for January and February when production averaged just over 60 million tonnes for each month.
In fact Chinese crude steel production has been gradually easing since peaking in May of this year at more than 70.5 million tonnes. That slow slide has had no impact on global iron ore or coking coal prices.
In fact the prices for both have soared since May - hard coking call peaking at more than $US300 a tonne (now around $US280) and iron ore peaking this month at more than $US82 a tonne.
Total output for the first 11 months of 2016 edged up 1.1% to 738.94 million tonnes.
In 2015, China’s output dropped for the first time since 198, to just over 803 million tonnes, from the record 822.75 million in 2014, as weak metal prices and a government clampdown on excess capacity forced plants to shut or suspend operations. To maintain that 1% rise crude steel production will have to top 811 million tonnes this year, with December production coming in at 70 million tonnes or more - a big ask given the slide in output since May.
Shanghai rebar futures (that’s reinforcing bars, the best indicator of pricing in China with its current construction surge) have surged 95% percent this year.
That looks like continuing into 2017 when the price surge will ease simply as the comparative base changes gradually to weeks and months this year when prices soared. Even though prices for steel products have risen sharply, the monthly investment figures for November showed more signs of real estate investment slowing.
The National Australia Bank pointed out last night in a note on China’s November data flow that the country’s “fixed asset investment recorded slightly weaker growth in November – which may mark the end of the modest recovery in investment from the weak levels mid-year. Investment in real estate was marginally weaker, house sales recorded the lowest rate of growth this year and monthly growth in house prices slowed. That said, it is too early to know if the policy restrictions on the housing market are having an effect.”
But it is something to keep in mind as we head into our end of year break.
But one small positive is the continuing smog problems in northern China because of the cold winter. The government is trying to boost production of thermal coal to put a lid on prices and maintain electricity supplies at a time when demand for power is booming (up 7% in November year on year and the fastest growth rate so far in 2016).
There are stories of the government tying to control pollution by restricting the movement of coal trucks and other measures - all of which point to continuing solid prices for thermal coal out into the early months of the second quarter of next year.
Reuters reported that “Beijing’s environmental watchdog is considering a ban on the use of trucks to transport coal and closing coal storage facilities in Tianjin, one of China’s busiest ports, a researcher with the agency said, in what would be a drastic move to tackle smog." Reuters says 100 million tonnes of coal a year flows through the port from Inner mongolia and from offshore (from Australia for example). It is also the major destination for iron ore shipments.
Reuters said the sort of measures being contemplated could see 43 million tonnes of coal a year forced to other Chinese ports from Tianjin. There was no mention when this would happen (and if it would occur), but the pollution in the city is very high.
Such a move would boost coal prices for a while and lift costs in the longer term because of the added charges for sourcing it from other ports.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.