The rest of steel prices in China are declining, but prices remain high

Fitch Ratings expects steel price growth in China to slow in the coming weeks as summer approaches, as downstream demand tends to fall during the season due to sluggish construction activity. However, the combination of high iron ore prices and new environmental regulations restricting supply is likely to keep steel prices high. We expect this to benefit larger steelmakers who have greener production facilities and are more resilient to production cuts.

Steel prices in China have risen sharply since the beginning of the year, with the rally picking up steam in early May, following Labor Day in China, as processors began to replenish steel inventories. For example, rebar prices have risen to RMB 6,000 per ton, including value added tax, by more than RMB 600 per tonne since the end of April. This rally is the result of a combination of factors, including strong demand from the construction industry, as well as the production of electronic vehicles, the introduction of production restriction policies and higher prices for iron ore. Iron ore accounts for almost half of the cost of steel production; the price increased by more than 40% in the year to 12 May 2021, compared with a 20% increase in the cost of steel products over the same period.

Manufacturing restrictions in Hebei Province also play a big role in the rally. Tangshan, the province's main steelmaking region, which accounts for about 15% of China's total crude steel production, introduced a production cap policy of between 30% and 50% during the year to reduce carbon emissions. According to the CRU, this is likely to result in a drop in production of more than 30 million tonnes per year and is in line with government demands to reduce crude steel production year-on-year from a 2020 record high of 1.05 billion tonnes.

We expect HBIS Group Co., Ltd. (BBB + /Stable), as a leading steel producer in the region, will benefit from the cutbacks as the company's facilities are more environmentally friendly and face fewer cutbacks. Meanwhile, China Baowu Steel Group Corporation Limited (A /Stable) is likely to generate higher cash flow than we previously expected in 2021 as its diverse production capacity and product offerings make it more resilient to local production curtailment policies. ...