Chinese power shortage hampered smooth smelting operations of manufacturers
of numerous metals. Hubei, Shaanxi, Jiangsu, Xinjiang i.e. regions with highest
production capacities of fertilizer, coal, steel, copper, aluminium, lead, zinc and
nickel have been severely affected. Fertilizer plants have been allowed to operate
unhindered due to food security concerns. However, other manufacturers will bear
the brunt of supply constraints. We contend that margins of steel products will see
pressure going forward due to weak demand after automobile / home appliances
/ construction firms shut down and supply resume as smelters open up after
meeting production cut targets. Excess supply of steel products in China may then
find their way in other markets such as Pakistan leading to lower price here as well.
Like yesteryears, electricity demand in China for heating purpose is on upward trend with approaching onset of winter season. This has led to high coal demand amid limited supply avenues. Chinese administration has directed mines to ramp up production, however, coal demand is likely to outstrip supply for near future keeping escalated prices intact for some
time to come. Moreover, power companies are not allowed to use surge pricing or higher tariff, thus power producers have restricted production due to high input costs. This has led to complete shutdown of few industrial units until further notice. Power rationing is being observed in 18 provinces. Paper and glass manufacturers are finding it difficult to get continuous power supply, which may lead to lower output and lower exports of these commodities to Pakistan.
China meets 56 percent of its power needs from coal fired power plants. To control emissions, government implemented dual control system where it set targets for provinces regarding energy consumption and energy intensity. To achieve these goals, crude steel
production target for 2021 was below the levels observed in 2020. Each province was handed production cut targets few months ago. Mills in Hebei, with highest steel production capacity have been producing low output since last 3 months and are expected to meet their annual production cut targets by October end.
Steel production in Hebei based mills is expected to ramp up from November onwards – after meeting annual production cuts quota – bringing down margins. Rerolled long steel demand has also tapered down following Evergrande debacle. To prevent the property market from turning into a bubble, Chinese government has implemented “Three red lines” test that deter construction companies from assuming further debt for new projects. These measures will likely result in muted demand for long steel products in China for near future. Steel scrap prices are on downward trend since mid of May when they peaked at USD525/Ton. After retracing back by USD75/Ton from its high, scrap prices are currently trading at USD440/Ton.
On flat steel front, demand of flat steel in China is expected to falter with inhibited
operations of home appliances, automobiles and other allied manufacturers due to
power shortage. This may result in higher exportable quantity of steel in China
putting pressure on margins in other countries (such as Pakistan).