China's Restrictions Hit Smaller Steel Producers

Chinese authorities 'winter restrictions on steel production in the northeast and broader efforts to curb carbon emissions are temporarily reducing steel companies' sales, but the impact on profits will be offset in part by higher prices and margins, Fitch Ratings said.

Smaller steelmakers are already facing high fixed costs and high investment pressures while meeting new environmental standards for equipment. They tend to invest less in emission control equipment and may now need larger reductions than manufacturers with better emission histories.

Production cuts are being introduced to help meet emission targets for the winter months, which range from around mid-November to mid-March and are usually associated with heavy pollution from coal heating. The reduction will be most affected by sintering and iron foundries in Hebei, Henan, Shanxi, Shandong and Tianjin, which account for about half of China's iron and steel production.

Plants in these regions may need to cut production by 50% on average during the heating season. So far, production cuts have been in line with expectations at the start of winter.

The cutback in production is likely to drive up steel prices. Other heavy industries that consume large amounts of steel, such as construction, will also be constrained by emission targets, but steel supply is likely to fall more sharply than demand. Meanwhile, low iron ore prices will contain costs and support margins.