A worker takes a sample of molten metal during a government-organized tour at a Tiangong International, high-quality steel and tooling factory, in Zhenjiang, east China’s Jiangsu Province, on October 12, 2020.

Hector Retamal | AFP | Getty Images

China plans to cut steel production this year, but that could prove difficult.

According to a note from Wood Mackenzie, Chinese steel mills produced almost 12% more crude steel in the first half of 2021 compared to the same period in 2020.

China produced a monthly record of 99.45 million tons of steel in May, although the number fell to 93.88 million tons in June, Reuters reported.

The steel sector is one of the biggest polluters in China, causing around 10 to 20% of the country’s carbon emissions. Beijing has targeted the industry as part of its drive to reduce carbon emissions and reach net zero by 2060.

It would take a real hit on the brakes to get that down.

Paul Bartholomew

Lead Metal Analyst, S&P Global Platts

Production is likely to be lower in the second half of the year, but pushing it below 2020 levels could be challenging, analysts say.

“To get that down, you’d really have to step on the brakes. We expect steel production to grow 8-9% this year, ”Paul Bartholomew, senior steel analyst at S&P Global Platts, told CNBC on Thursday in an email.

Industry insiders speaking in virtual forums during the Singapore International Ferrous Week in July argued similarly.

It will be “virtually impossible” for China to produce less steel this year than last year, said Rohan Kendall, director of iron ore exploration at Wood Mackenzie, at the Singapore Iron Ore Forum.

‘No choice’ but to comply?

However, a senior official at Chinese steelmaker Hesteel said steel mills need to pay more attention to reducing their production in order to comply with government policies, especially the state mills.

“We have no choice but to follow government rules,” said Mu Guoqiang, director of steel imports and exports at Hesteel, at Fastmarkets’ Singapore Steel Forum.

China says it has committed to further cuts in steel production, and its plants in Tangshan Steel City reportedly cut production after being warned of penalties for producing too much.

But not everyone agrees that the government will get its way.

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With the number of private and state-owned factories in China, it is very difficult for authorities to control production, said Zhuang Bin Jun, a former manager of the business development group at Fortescue Metals.

There is very strong demand for steel in the country and production is unlikely to decline in the coming months if the profitability of steel production is as good as it was in the first half of the year, Zhuang said at the iron ore forum.

High steel prices and high steel production (are) actually only a symptom of high steel demand.

Rohan Kendall

Head of Iron Ore Research, Wood Mackenzie

Bartholomew of S&P Global Platts said trying to limit steel production would drive prices up and mills not affected by government restrictions will be encouraged to produce more.

“The important thing is that the mills have made decent money for much of the year … and the mood generally remains good so the industry is looking to take advantage of any profits on offer by producing a lot of steel,” he said.

Demand outlook

The best way to cut production would be to focus on reducing demand, although such policies could weaken the economy, Bartholomew said.

Wood Mackenzie’s Kendall said authorities could crack down on the real estate or construction sector, which uses a lot of steel to drive down demand and prices.

“High steel prices and high steel production (are) only a symptom of high steel demand,” he said.

Other market watchers predict that demand will decline, but doubt that the decline will be enough to limit production to 2020 levels or below.

Erik Hedborg, chief analyst at the commodity intelligence company CRU, said steel demand could be lower in the second half of the year, partly due to the slowdown in the construction sector.

In addition, demand for steel-containing consumer goods from China is weakening after staying high for the past 12 months, he said at the iron ore forum.

“As a result, we will definitely see lower steel demand in China,” he said.

Hedborg said: “We are skeptical” whether demand will drop so far that steel production will drop below the level of 2020.