Supply-side reform has profoundly changed the metallurgical industry

The future of China's steel industry must be 'larger blast furnace, closer to the coastal areas, more green and environmentally friendly', which is equally important for the decision-making of downstream industries (such as mines).

Text / Bai Weicheng (Arnoud Balhuizen)

In the past two years, China's steel industry supply-side structural reform is undoubtedly one of the most important policies affecting the commodity market. In the years before the implementation of supply-side reform, the global steel industry was seriously oversupplied, and enterprises suffered large losses. The reforms have achieved remarkable results today, and the overall profitability of the industry has improved significantly.

At the end of 2015, the Chinese government set a goal: By 2020, the steel industry will reduce its crude steel production capacity by 150 million tons. In the initial stage, the main focus will be on eliminating the capacity of idle electric arc furnaces and old converter steelmaking. Subsequently, the central government announced the second round of initiatives. : In 2016, it shut down more than 120 million tons of medium frequency furnace capacity in the country. When the terminal demand is still relatively strong, this measure makes the supply and demand relationship in the steel market tend to be tense.

With the implementation of supply-side reforms, China's steel capacity utilization rate has increased by about 15 percentage points from the low cycle (from less than 70% to around 85%). Although the coal industry is also positively affected by supply-side reform policies, metallurgy Coal prices have risen sharply, but the profit margin of the steel industry has also improved dramatically with the increase in capacity utilization.

The question we need to think about now is: How much progress will the entire steel industry chain be affected by the supply-side reform dividend?

BHP Billiton estimates that about two-thirds of the increase in capacity utilization in the steel industry will continue for a long time. We believe that if the steel industry can achieve 80% capacity utilization and steel mills average 3%-4% during the entire cycle. The long-term net profit margin, steel producers can achieve sustainable and healthy development, and will not cause excessive cost pressure on downstream end users.

This transformation has had a profound impact on the steel and metallurgical raw materials market. According to our experience, the factors that the steel purchase managers consider in different profit situations and the final choice will also have different emphasis. When the profit margin is very low or At a negative time, steel mills have a low willingness to increase productivity. At this time, they are more inclined to use more low-quality raw materials to control production costs. Therefore, the premium of high-quality metallurgical coal and iron ore will be compressed, and The discount on low-quality raw materials will also be reduced. Conversely, the incentives of the steel mill will change the policy, and the procurement team will change the policy and prefer to use relatively higher quality raw materials to meet the urgent need for productivity improvement. At the same time, the demand for low-quality raw materials is correspondingly reduced.

Since the end of 2016, the rebound in steel mill profit margins has been a key factor in the increase in premium raw material premiums and the expansion of low-quality raw materials.

Last winter, the Beijing-Tianjin-Hebei and surrounding areas '2+26' cities implemented environmentally-friendly measures for peak production, which caused steel mills to reach new highs. As a result, steel mills outside the restricted production area expanded production at near full capacity. During this period, we noticed that the price difference between 62% grade iron ore and lower grade iron ore (including 58% grade and lower grade) hit a record high. High quality low volatile coking coal (Platinum PLV index) The spread between the medium volatile volatile coking coal (PMV index) and weak coking coal has also increased significantly. At the same time, the premiums of lump ore and pellets have also increased significantly.

We believe that China will continue to promote supply-side reform policies. The next strategic focus will be to shift production capacity to industrial structure optimization and upgrading, and produce higher-quality steel products through larger volume, more efficient ironmaking blast furnaces and coke ovens.

At the same time, China is paying more and more attention to environmental protection and ecological civilization. This has forced the steel industry to explore greener and more environmentally friendly production models to meet increasingly stringent environmental pollutant emission standards. In particular, China has enacted ultra-low sulfur oxidation. Airborne emission standards for substances (SOx) and nitrogen oxides (NOx).

We have always believed that the blueprint for the development of China's steel industry in the next decade is 'a larger blast furnace, closer to the coastal areas, and more green.' China's active supply-side reform policy has already achieved this goal greatly ahead of schedule. Decisions on downstream industries (such as mines) are equally significant.