· Prospect of mandatory cuts has lifted sentiment

· But implementation remains to be seen

· Capacity reduction set to be a tough and lengthy task

Growing speculation over mandatory steel output cuts and capacity reductions in China may have boosted sentiment and steel prices lately, but market participants remain cautious over the outlook for the market.

Even if the government mandates steel output restrictions in a bid to balance the market amid shrinking steel demand, there are doubts over how strictly any such orders would be implemented, while actual reductions in steel capacity would be a lengthy process, with a decline in capacity unlikely to be achieved this year, according to sources.

Amid improved sentiment, the Platts-assessed domestic HRC prices rebounded to Yuan 3,290/mt ($452/mt) on April 28, up from Yuan 3,230/mt on April 24, but still 14.3% lower from a year ago under the pressure of rising production. Platts is part of S&P Global Commodity Insights.

China’s crude steel output over January-March increased by 0.6% year on year to 259.33 million mt, data from the National Bureau of Statistics showed.

Output cuts

On April 28, the China Iron & Steel Association, or CISA, held a meeting with related government authorities and leading steel mills to discuss policy measures to promote the high-quality development of the steel industry.

Minutes from the meeting were not disclosed but market talk suggested steel output controls and capacity reductions were two key issues addressed.

Various mill sources in northern, eastern, central and southern China said they have not yet received any government orders or guidelines for steel output cuts for 2025.

However, some of the sources noted that controlling steel production has been a fundamental policy since 2021 and that they expect this will continue. One key issue is how to allocate production cuts among mills, however, as well as how strictly they are implemented.

Meanwhile, state-owned Baosteel said during its investors conference on April 28 that it is highly likely the government will introduce mandatory steel output cuts later in 2025, but that volumes and implementation measures have yet to be decided on.

The company said mandated production cuts should take into account the profitability and environmental performance of a steel mill.

It added that its parent Baowu Steel Group would allocate any output cut targets internally to ensure that Baosteel maintains production at full capacity in 2025.

Some market sources said trimming national crude steel output by around 50 million mt, or 5%, would be enough to lend upward momentum to steel prices -- but that steel mills would be reluctant to cut production unless they already suffer big losses.

Capacity dilemma

According to CISA, China’s steel demand has entered a long-term downward trend with its property sector having peaked and infrastructure construction slowing.

It said the development of the country’s manufacturing sector has yet to reach its peak, but the sector will face greater challenges in 2025 as headwinds in the export markets have intensified amid escalating trade tensions between China and the US.

To tackle shrinking steel demand, the association has recently recommended the government establish a special fund for steel production capacity exiting.

Some sources said China’s crude steel capacity could have reached around 1.25 billion-1.3 billion mt by the end of 2024.

But according to Commodity Insights data, China’s domestic steel consumption fell 3.2% on the year in 2024 to 870 million mt, and is likely to fall further in 2025, by 2% on the year to 853 million mt.

“Trimming steel capacity is no easy task, considering the steel industry’s contribution to the GDP and sizable employment... this may not happen in 2025, but in the next five to 10 years, China’s total steelmaking capacity may have to be cut by 20% in tandem with falling demand,” said a mill source.

Some trading sources said it will be difficult for the steel market to escape a downturn before capacity really starts to decline.

China’ steel industry accounts for around 6% of the country’s GDP, and as of February, employed around 1.745 million people, down 3.8% year over year, according to NBS.