Steel output rises to near record high

Mills operating at close to full capacity despite weak demand

China's daily crude steel output rose 1.3 percent in September to the highest level in three months, data from the country's statistics agency showed Tuesday, suggesting mills were still close to full capacity despite weak demand.

Persistently high steel output from the world's top producer could further drag down Shanghai rebar futures, which sank 13 percent last month, and also dent spot iron ore prices that are reeling from a supply glut as global miners of the steel-making ingredient push ahead with expansion plans.

China produced 67.54 million tons of crude steel in September, down 2 percent from the previous month and flat compared to the corresponding month of 2013, said the National Bureau of Statistics.

But the daily output rate rose to 2.25 million tons from 2.22 million tons in August, driven by a slight improvement in industrial activity. This was the highest since June when output touched a record of 2.31 million tons per day.

"The 1.3 percent increase matches the recovery in electricity consumption versus August as well as the slightly better monthly PMI results," said Melinda Moore, analyst with Standard Bank, referring to data showing growth in China's manufacturing sector held up in September.

China's total crude steel output is expected to reach around 820 million tons this year, short of its overall capacity estimated at 1.1 billion tons but still outstripping demand.

A slowdown in China's economy has shrunk its steel demand, aggravating overcapacity problems in the sector.

While there are no signs that conditions will improve in the final quarter, steel firms have continued to pursue a strategy based on outlasting rivals.

"Mills prefer market share maintenance, hoping the strong will survive and the weak will fall away," Moore said.

Persistent overproduction in China has driven prices to record lows this year, and despite a surge in imports, iron ore prices have also slumped around 40 percent since the beginning of 2014.

Crude steel output over the first three quarters of the year reached 618 million tons, up 2.3 percent on year, the National Bureau of Statistics said.

Based on September daily runs, output stood at 821.25 million tons on an annualized basis, up 5.4 percent from the official 2013 rate, according to Reuters calculations, which do not take into account a 3.7 percent upward revision to last year's January-September production data.

While production has remained close to record highs, the China Iron and Steel Association (CISA) has said that apparent steel demand actually fell in the first eight months of 2014, with all additional production over the period diverted to the export market.

Mounting losses and financing problems have already forced a number of steel producers to halt their operations, but the impact on overall output has been negligible, with other mills stepping in to fill the gap.