A number of small steel mills in northern China are planning to cut production to attenuate losses in an extremely weak market stemming from low sales amid bearish sentiment, industry sources said Tuesday.
"Last week there were some smaller steelmakers in north China that said they were going to cut production and there will be more this week, maybe even some larger mills," a Beijing-based trader said.
Industry sources attributed the planned cuts to the mills' incurring losses as well as high steel inventories due to low sales.
Steel prices have been under pressure from a perennial issue of overcapacity and weak demand.
Three Chinese steelmakers in northern China said mills were making an average loss of Yuan 300/mt ($47.75/mt) for every metric ton of crude steel produced.
Further pressure on Chinese steelmakers came from comparatively high raw material costs, given that the spike in iron ore prices between last December and early this year has far outpaced any gains in steel prices over the same period.
The Platts 62% Fe IODEX assessment hit $160/dmt CFR north China on February 20 - its highest level so far this year. This marked a 9.2% increase from the start of the year and a 35.6% climb since the start of December 2012.
Iron ore prices have since weakened, falling 8.4% from its peak to be assessed at $146.50/dmt Monday.
"The outlook isn't too good for downstream players now, so cutting production is quite a normal move to take, especially since steel stocks are on the high side now," said a source at a Tangshan mill that is mulling a production decrease.
Chinese downstream sources said these production cuts will be carried out either by idling blast furnaces or by scheduling maintenance activities.
"Some mills will bring forward their planned maintenance dates for their blast furnaces and take advantage of a weak market to do so," a second Tangshan mill source said.
Additionally, sentiment for the steel industry took a bearish turn after the release of new governmental policies in China last Friday, which sought to strengthen earlier real estate regulations.
These new regulations - part of a new set of policies that translates literally to 'The Country's Five Policies' in English - will focus on stricter control on housing loans, higher capital gains tax rates for homeowners selling their properties, and down payment issues.
The policy announcements sent steel prices tumbling over the weekend, with October - the most active rebar futures contract - last trading at Yuan 3,905/mt Monday, down Yuan 115/mt from Friday.
However, not all steelmakers were contemplating a cutback on their production.
Despite making losses, market participants said state-owned steel mills are not scaling back on their crude steel output as readily as some smaller steelmakers might because they have a bigger moral obligation to keep their workforce afloat.
Sources said mills are usually very cautious on making decisions on output cuts as it can be even more costly for mills to idle their blast furnaces and have to restart them later.
"As long as the losses are minimal, mills will prefer to keep their output steady as usual, and try [instead] to sell their crude steel at a better price when there is a recovery in steel prices," said a Tianjin-based mill
Some privately-owned mills are not considering output cuts due to high fixed costs.
"We are making losses now as demand for steel remains low, but we will incur even more losses if we cut down on output as it will impact our cash flow," said a third Tangshan-based steelmaker.
Source: Platts