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China vow to cut steel production boosts iron ore

By YIFAN XIE & Dow Jones , 2017-08-01 09:41:42

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Beijing’s renewed vows to slash steel capacity triggered a big rally in Chinese metals futures, again highlighting the government’s ability to move markets — but also raising concern that prices have become overextended.

Steel rebar and iron ore led the gains last night after Premier Li Keqiang over the weekend called for further efforts to cut overcapacity in steel production.

Iron ore — the major raw material of steel — rose strongly at the open and steadily climbed to hit the 8 per cent daily limit for gains or declines. Prices held for the rest of the session on the Dalian Commodity Exchange, putting them at a four-month high of 570.5 yuan ($US84.66) a tonne. In Shanghai, benchmark steel-rebar futures rose to 3,733 yuan, a three and a half year high, up 4.7 per cent on the day and 27 per cent from June’s low.

According to The Steel Index, the price of iron ore overnight was up 5.9 per cent to $US73.1 a tonne.

“The market is in a hyperexcited state since funds tend to flood in the moment any policies on capacity cuts is released,” said Fan Qingtian, an analyst at Nanhua Futures Co. “It’s pretty crazy.”

Beijing has repeatedly warned against illegal steel production, which has picked up of late along with steel prices.

China first pledged “supply-side reforms” for its steel and coal sectors — reducing excessive production capacity that had long plagued them — in January 2016. Capacity was cut by 6 per cent and 8 per cent, respectively, last year.

This year, at least two-thirds of targeted 2017 reductions had taken place by May. In the first half, the government said, some 120 million tonnes of low-grade steel capacity targeted because of the pollution it causes was eliminated — 11 per cent of the country’s steel capacity and 15 per cent of annual output.

But two mills in Tianjin and Hunan that had been ordered to end production of low-quality steel-rebar by the end of June were found still churning out substandard products after the deadline, said a statement posted on the website of the State Council on Saturday.

“We must stand firm in capacity-cutting efforts to prevent shutdowns in production from flaring up again,” said Mr Li on Saturday, according to the official Xinhua News Agency.

However, a bulk of the capacity set for cutting was never in actual production, analysts say, and a large portion of the illegal high-pollution low-grade capacity that was eliminated has been replaced by legal capacity.

Still, the capacity clampdown is expected to significantly improve the profitability of China’s debt-laden mills. The state-run Xinhua News Agency recently said that midyear reports from 21 of 24 listed steel companies are projected to show higher earnings than a year earlier.

Mr Li’s comments came ahead of upbeat economic data yesterday for the steel industry from the purchasing-manager-index figures for July.

Though steel demand has supported the latest jump in iron-ore and steel-rebar prices, speculative fervour is also at work, said S & P Global Platts analyst Hongmei Li: “People are looking at steel and iron-ore futures to gamble.”

Demand is projected to cool for the rest of 2017, analysts say, especially in residential construction. And steel-rebar stockpiles have been growing since June as weather delayed overall construction activity, according to Soochow Futures Co.

ANZ Bank analyst Daniel Hynes warned about a rerun of the cycle from earlier this year: After charging higher to start 2017, iron ore fell as much as 38 per cent and steel rebar 17 per cent. High output should worsen the iron-ore oversupply into the end of 2017, added He Ming of consultancy Wood Mackenzie.

Source: www.theaustralian.com.au

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