Chinese industrial production for December revealed the highest monthly steel production since June 2021 at 86.4 MMT for an annual steel production of 1,033 MMT, 1.9% down YOY after September-December averaged 18% down YOY. The number compares to our July forecasts of 1,121 MMT and our 2022 estimate of 1,153 MMT.

Raw material-intensive pig iron production was 72.3 MMT and the highest since July, which represents 84% of steel production in line with the total for 2021 which saw pig iron production decline 2.1% YOY. The 2021 total of 869 MMT compares to our estimate of 923 MMT from the July sector report, which we forecast to grow to 954 MMT in 2022.

Despite steel production picking up in December to a run rate production above 1,000 MMT from the September-November average of c850 MMT, it remains to be seen how Chinese steel production will hold up entering 2022. With a lower import price on iron ore (and also coal) steel margins should be improving, and soon the winter Olympics with the associated blue-sky policy will be behind us.

Drastic times call for drastic measures for Chinese coal

China’s December coal production jumped to 10% YOY growth and closed the year at 4,041 MMT, a 5.9% increase from the 2020 record production of 3,844 MMT. The production increase is a response to galloping energy prices despite the country’s earlier actions to scale down domestic output. The soaring demand stems from thermal electricity generation increasing 9.3% in 2021, in line with overall electricity production (9.4%) as hydro disappointed (-2.5%) and alternative sources like wind (36.7%), nuclear (11.3%), solar (29.3%) failed to make up for the shortfall. Thermal electricity generation accounted for 71% of the energy mix in 2021, in line with the prior year, while hydro was 15%, wind 7%, nuclear 5% and solar 2%. As mentioned last week, Chinese coal imports ended above the unofficial 300mt limit and near 2013 highs.

As a result of elevated imports and the Chinese domestic production increase, we find Chinese coal prices have come off their highs above USD350/tonne in October. During November various coal prices were around the USD150/tonne mark, but Chinese prices have since then dipped to cUSD110/tonne. In the meantime, European and South African coal prices have hovered around USD150/tonne, while Australian coal prices have surpassed USD200/tonne on the latest events in Indonesia. Hence, the current differential of cUSD100/tonne between Chinese and Australian coal would signal China is well supplied, while other Asian counterparties look to have bid up Australian coal in a scramble to secure supplies as Indonesia, the world’s largest coal exporter, recently imposed its export ban. The large discrepancy is likely short-lived, but in our view illustrates a more diversified demand base for coal countering the intuitive price response when Chinese prices weaken on production hikes.

Operations in Minas Gerais partially resumed

Vale has partially resumed operations in Minas Gerais and estimates the impact for its iron ore production to be limited to 1.5 MMT. In the Southeastern system, production has resumed while some transportation lines are still affected. For the Southern system, half of the production capacity has resumed operations, while the other half is expected to resume production within the coming days. Based on Vale’s trailing twelve-month iron ore production, we estimate that roughly 25% of Vale’s daily production has been affected by heavy rains. Of note, Vale reiterates that the company considers the seasonal impact of the rainy season and reiterates its iron ore production guidance of 320-335 MMT for 2022.