Chinese steel prices fall on scepticism over emission policies

Industrial metals updates

Chinese steel prices tumbled on Monday following signals that Beijing was easing the pace of plans to cut carbon emissions in the world’s biggest emitter of greenhouse gases.

The price of steel futures in Shanghai fell 6 per cent, following a meeting by the politburo on Friday that urged for a correction to “campaign-style” carbon-reduction plans by local governments.

The remarks suggested an attempt by Beijing to cool efforts to reduce carbon emissions by tightening controls on heavy industry, in order to safeguard economic stability. China has said it is seeking to reach peak carbon output by 2030 and become essentially “carbon neutral” three decades later.

The politburo said the country should carry out its work to meet its carbon emissions targets in an “orderly and unified” way, according to official media. China has pledged to cut production in its mammoth steel industry, which accounts for about 15 per cent of its national carbon emissions due to its reliance on coal.

Steel production rose to a record in the first half of this year, but analysts expected production to fall in the second half as local governments instituted cuts. China’s crude steel output fell 5.6 per cent in June from a month earlier, according to official data.

It was expected that further output declines would place upward pressure on the price of steel. But the politburo’s comments have raised questions about how Beijing will make sure output does not exceed last year’s record of 1,054m tonnes.

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“With the politburo’s comment, we expect steel production controls will be more gradual paced going forward,” said analysts at Morgan Stanley.

Morgan Stanley said that while steel production will decline in the second half of the year, annual production will still be up by between 4 per cent and 5 per cent compared with last year.

The price of iron ore, which is needed to make steel, fell more than 11 per cent last week, sinking to a three-and-a-half-month low of $180.50 a tonne on Friday, according to an assessment by S&P Global Platts. It recovered to about $183 on Monday, with expectations for higher steel production helping lift demand.

The commodity, a key source of profits for big miners including Rio Tinto, BHP and Vale, has had a barnstorming run from the depths of the Covid-19 crisis, climbing from $80 to a record high above $233 in May on the back of strong demand from China and supply disruptions.

But on the supply side, iron ore shipments from Brazil, Australia and South Africa are expected to pick up in the second half of the year, which could put further pressure on the price. Based on recent production updates from Rio, BHP, Vale and Anglo American, Morgan Stanley forecasts that output would rise 55m tonnes in the next six months, a 10 per cent increase on the first half of the year.

Miners, however, appear braced for lower prices. Rio’s chief executive Jakob Stausholm last week told the Financial Times that $200 a tonne iron ore was unsustainable.

Surging iron ore prices helped Rio deliver a record half-year profit and return more than $9bn of cash to its shareholders.

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