China’s illegal scrap mill crackdown closes in on biggest steel-making city

Bloomberg

China’s crackdown on illegal steel mills, which has sent prices to
two-year highs, would target about 6 percent of output in the nation’s biggest steel-making city of Tangshan, according to consultancy Mysteel Research.
Tangshan’s total output of about 100 million metric tons — around an eighth of the nation’s supply — includes about 6 million tons of steel produced by electric induction furnaces that melt scrap steel and turn it into new products, Mysteel analyst Liu Bin said by phone from Beijing. The process can be insufficient to properly purify the metal leaving substandard steel as a result.
Steel reinforcement bar on the Shanghai Futures Exchange surged 5.1 percent on Wednesday to its highest since April 2014 after news that scrap producers were being investigated, while hot-rolled coil added 3 percent to the most
since the contract began trading in March 2014. Rebar and coil are up by about 50 percent this quarter, boosted by the government’s splurge on infrastructure as it seeks to maintain growth.
Both products fell 1.2 percent on Thursday. “Prices are correcting after the recent rally on news of
the crackdown,” Xu Ke, an analyst at Huatai Futures Ltd., said by phone from Shanghai. “We still expect steel futures to continue moving higher
as at the moment the market is bullish on supply cuts and stockpiling from traders.”
Local governments in Hebei and Jiangsu province will shut plants that produce substandard steel from scrap, and cut their supply of power and water, according to people with knowledge of the probe on Wednesday, who asked not be identified because the order isn’t public. The investigation was first reported by Shanghai Securities News and could cut supply at a time of robust demand and boost profits at China’s larger mills. Nobody answered calls to Hebei and Jiangsu’s provincial government offices.

SUBSTANDARD STEEL
“These furnaces largely produce low-quality construction steel,
and some have even been accused
of labeling their product as being from other steelmakers,” Tomas Gutierrez, analyst at Kallanish Commodities Ltd. in Shanghai, said by phone on Wednesday. “An effective closure could give another boost to rebar prices.”
Most induction furnaces produce construction steel such as rebar, much of which is exported, Mysteel’s Liu said. Lower output from steel scrap mills will boost demand for high-grade iron ore, Zhao Chaoyue, analyst with China Merchants Futures, said by phone from Shenzhen on Wednesday. That helped push up iron ore futures by 6.6 percent on the Dalian Commodity Exchange on Wednesday to its highest close since 2014. The raw material fell 1.8 percent on Thursday.