Chinese manufacturers of flat products intend to cash in on the economic boom

According to industry analysts, China’s top flats producers expect to profit from the recovery in global production and demand for goods after COVID-19 in 2021, as well as from emission reductions that are likely to knock out costly competitors.

Hot rolled coil (HRC) flat steel prices have risen 50% in the past six months as Chinese manufacturers revived after the coronavirus restrictions were lifted in mid-2020.

The demand for sheet steel from the manufacturing industry is improving significantly, and the iron and steel industry will experience the largest supply shortage since 2017, when supply reforms led to a reduction in the capacity of steel mills, analysts at CITIC Securities said.

“The profits generated by the steel companies are likely to be record high this year,” CITIC Securities said.

PRODUCTION MANIA

Consumption of flat products has skyrocketed since the second half of last year, as a giant production engine in China mass-produced home appliances, shipping containers, vehicles and other goods that are in high demand around the world.

This momentum has expanded to 2021, when industrial output in January-February increased 7.3% from December and 35.1% from a year earlier, and is expected to accelerate as all more regional economies will recover from the 2020 COVID-19 fall.

The supply of heavy metal products to overseas markets has skyrocketed this year. Exports of newly manufactured containers more than doubled in January-February compared to the same months in 2020, while exports of vehicles increased by 85%.

“We expect flat steel to outperform construction materials this year … while a rebound in overseas markets will benefit Chinese exports of these metals,” said Shen Yungang, an analyst at Huatai Futures in Beijing.

DELIVERY REFORM 2.0

While industrial activity has boosted the profitability of steel mills across the board, it is China’s goal of carbon neutrality – what some call “Proposition 2.0 Reform” – that has the potential to transform the sector in favor of the largest players, analysts say.

Steelworkers account for 15% of China’s carbon emissions, making the sector key to whether the country can meet its goal of becoming carbon neutral by 2030.

China’s Ministry of the Environment recently stepped up inspections of steel mills in Tangshan, the country’s iron and steel center, after it found four plants had failed to take emergency pollution control measures to improve air quality.

As a result, production fell from 30% to 50% for the remainder of the year at 23 steelmaking plants in the city, including plants owned by the state-backed HBIS group and private operators, which were deemed to be in short supply. sufficient contamination control. This is expected to increase the profitability of factories capable of operating at full capacity.

“Half of the steel in Tangshan is flat products,” said Li Wentao, an analyst at Tianfeng Futures.

“If the production contraction continues, the total profit from flat products could reach or even exceed 2018,” Li said, referring to the big gains in the industry following China’s supply reform to eliminate excess and obsolete steel capacity.

Tangshan steel production was 144 million tonnes last year, accounting for 13.5% of China’s total production, and 45% more than the world’s second largest steel producer, India.

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