China’s Steel Inspections May Tighten Supplies as Commodity Prices Surge

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China began inspecting steel mills in an effort to rein in the emissions-heavy sector -- a move that could tighten supplies at a time when it’s trying to curb surging commodities prices.

The Chinese government has ordered nine groups -- consisting of officials from different cabinet ministries plus an industry body -- to visit all the country’s producing provinces to check whether outdated plants have been eliminated as agreed, according to people familiar with the situation. The inspections began June 15 and will continue through the end of July.

The objectives of the inspection also include checking environmental and energy-consumption standards are being adhered to by new steel projects, and progress on government agencies’ work on reducing crude steel production, said the people, who asked not to be identified as they aren’t authorized to speak publicly. The supervision plan was announced in April by China’s top economic planner, the National Development and Reform Commission, which didn’t provide details.

The NDRC didn’t immediately responded to a fax seeking comment.

Since 2015, President Xi Jinping has been pushing to reform the industry that produces more than half the world’s ferrous metal. Last year, Xi also pledged a net zero carbon target, making it imperative that the country curb its steel industry that accounts for about 15% of its greenhouse-gas emissions, one of the biggest industrial culprits in adding to China’s carbon footprint.

However, Beijing has been struggling to rein in the steel sector due to steady demand from a booming property industry and massive spending in infrastructure.

The country’s steel mills churned out more than 99 million tons in May to set an all-time high. Production reached 473 million tons over the first five months, putting it well on the way to surpassing last year’s record of more than 1 billion tons, which Beijing said would be a high-water mark.

The production spike was largely encouraged by record prices, as steel rebar in Shanghai surged more than 70% from a low in September to a record in May. The rapid price gains triggered the central government to intervene in past weeks, sparking intense volatility in raw material prices.

The seeming discrepancies between curbing surging steel output and the government’s campaign to cap commodity prices and reduce speculation have puzzled investors. Wall Street strategists have said any attempt to stop the market rally will likely fail in the face of supply constraints and buoyant global demand, while China said speculation has cooled in the wake of the government’s stepped-up efforts.

In a notice posted by an NDRC department in May, the steel inspections were meant to deepen supply-side reform in the steel industry, promote consolidation and upgrading, and “realize green, intelligent development.” Severe violations found during the inspections would be reported to the State Council, it said.

©2021 Bloomberg L.P.

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