China's Ministry of Ecology and Environment has opened the door to a substantial increase in the use of coal for power production in the country's northern provinces who will now be allowed to set their own winter output curbs for heavy industry.
'Local authorities should carry out production cuts based on their individual situation and refrain from adopting blanket cuts,' the Ministry said in its final plan released before the weekend.
The most coal intensive of all Chinese industries is the steel sector, which in turn responds rapidly to changes in construction and infrastructure spending.
According to the OECD Chinese steel mill capacity dropped 100 million tonnes from 1.15 billion tonnes in 2015 to 1.05 million tons in 2017 which does not include an estimated 140 million tonnes of illicit production, since shuttered by authorities seeking to curb pollution and drive efficiencies in a sector heavily dominated by State Owned Enterprises (SOEs). Steel exports have dropped 13 percent to 47.2 million tonnes so far this year.
The Australian Governments Office of the Chief Economist, today said China’s steel market is about to hit its peak in 2018, but will shrink next year as local demand drops.
OCE said iron ore export earnings are forecast to decline 7.8 percent from A$60.4 billion in 2018-19 to A$55.7 billion in 2019-20, mainly due to lower prices but that iron ore will however, remain Australia’s biggest export earner in 2019-20.
Strong demand persists however, thought to emanate largely from domestic infrastructure spending and One-Belt-One-Road projects. Coupled with the lower production capacity, this demand has substantially boosted the profitability of steel makers, driving up the cost of steel and keeping the price of iron ore elevated.
The mill closures, and in particular the illicit production volumes shuttered during 2016 and 2017 combined with a 'free flow' production schedule over the winter months is now likely to cause a flood of steel into the local markets and abroad.
Going into next year as steel demand from housing construction skews to a slower growth trajectory, Beijing is increasing its spending on infrastructure including more than 75 million tonnes of construction steel needed to build subway networks in several large Chinese cities. Some will hit the export markets.
This stimulus package in all but name is very supportive of iron ore and Capesize iron ore transportation from both Australia (C5) and Brazil (C3) over the next few months, as mills will be looking to restock their iron ore inventory before the winter.