Steel Sector-Chinese Crude Steel Production (First Third of June):Output at Small, Medium-Sized Mills Starting to Decrease

China’s crude steel production in the first third of June was almost flat on the lastthird of May, annualizing at 787 million tons. Output turned lower at non-CISAmembers, but increased slightly at CISA members. Less cost-competitive smalland medium-sized mills may be starting to cut output in response to poor spreads.

    Attention is now likely to turn to the extent to which major mills cut production inlate June-early July.

    Output virtually flat on last third of May, small and medium-sized millsstarting to cut production: Crude steel production came to an annualized 787million tons in the first third of June, virtually flat on the last third of May (786million tons), according to figures from the China Iron and Steel Association.

    By type of mill, annualized output at small and medium-sized non-CISAmembers was 4.5% lower in the first third of June than in the last third of May,but up 1.3% at CISA members.

    Less competitive mills starting to cut production; issue now is how farmajor mills will follow: Less cost-competitive small and medium-sized millsmay be starting to cut production in response to poor HRC spreads recently.

    Major, more cost-competitive mills tend to be slightly slower to cut output thantheir smaller counterparts. From this perspective, attention is now likely to turnto the extent to which major mills cut production in late June-early July.

    Not bad news for Japan and Korea: We think it is good news in some respectsthat the steady rise in Chinese output since May has come to a halt. Exportmargins, primarily at Japanese blast furnace steelmakers, could improve ifcutbacks are stepped up and signs appear that Asian metal spreads havebottomed. Catalysts that could be good for Japanese blast furnace steelmakersinclude what happens to Chinese output (whether cuts materialize) and theoutcome of domestic contract-pricing negotiations