Companies

China May steel output hits record but daily rate falls

(Agencies)
Updated: 2011-06-14 16:22

China's steel mills defied credit tightening, razor-thin margins and a possible power supply crunch to produce a record 60.25 million tons of steel in May, although daily output declined slightly.

Crude steel output fell to 1.94 million tons a day from last month's peak of 1.968 million tons, but the industry still expects production to remain high until a seasonal lull in demand hits in July.

Overall steel output was up 2 percent from April, according to data issued by the National Bureau of Statistics on Tuesday.

"I don't see there being any big change in June -- production at big steel mills has not been cut, especially for long products, though there might be a slight decline in flat products," said Hu Yanping, analyst with industry consultancy Custeel.

Long products are used primarily by the construction sector, while higher-end flats are used in automobiles or household appliances.

Steel demand normally begins to fall in the hot summer months as construction activities slow, and Baosteel has already cut its prices for July delivery by 200 yuan ($30.85) per ton.

Traders said that while demand was not spectacular right now, it was still holding up reasonably well.

"Domestic demand is just so-so right now with the market worried about inflation being at such a high level, but I'm not expecting prices to fall that much in June after dropping throughout May," said a steel trader based in Beijing.

China's tightening measures have so far had no noticeable impact on steel output, and they have also failed to rein in inflation, which reached a 34-month high of 5.5 percent in May.

Tuesday's official figures are broadly in line with data released last week by the China Iron and Steel Association (CISA), which said daily output in the last 11 days of the month dropped 3.46 percent from its mid-month record of 1.984 million tonnes.

Power cuts imminent?

Analysts have suggested that China's steel mills are trying to produce as much as they possibly can ahead of a much anticipated crunch in electricity supplies over the summer, where capacity shortages could reach 40 gigawatts.

Steel mills are expected to be the first to suffer from any nationwide "load-shedding" campaign aimed at reducing pressure on the country's overwhelmed power grids when electricity consumption peaks next month.

Electricity supplies in a number of regions have already been capped, and some small mills have been affected, but CISA last month cast doubt on the idea that power restrictions would have a significant impact on steel supplies.

Hu of Custeel said the impact of the power shortages on the steel sector has been exaggerated, and that any decline in output in July and August was likely to be seasonal in nature.

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"I think prices are likely to be cut again in August because of the slowdown in demand, and that means there will be less motivation to produce so output will slow," she said.

Crude steel production has remained at more than 1.9 million tons a day since late February, compared with an average of around 1.7 million tons last year, with the industry continuing to shrug off warnings by CISA that chronic overproduction was eroding margins.

"Demand has to have increased significantly as well -- otherwise the price wouldn't have been able to stay at this level," said the Beijing trader.

"The steel mills are producing so much because they are still making profits, even though they are not that big."