Increased steel production in China is pushing iron ore prices higher but resulting in lower margins for Australian steel makers including BlueScope.

The production uptick at Chinese steel mills is expected to gather pace despite an edict for output to be curbed in a bid to reduce carbon emissions, analysts and fund managers say.

Australian Steel Association chief executive David Buchanan said that, in the past few weeks, there had been a step-up in China steel production. “We can certainly see the demand signals there. We can certainly see production is definitely ramping up,” Mr Buchanan said on Monday.

This is helping to underpin strong iron ore prices for miners such as BHP and Rio Tinto, although prices slipped on Monday. The China Iron Ore and Steel Association said crude steel output in August and in the first 10 days of September was higher than in the same period in the last three years. Iron ore demand in China is increasing as Beijing rolls out economic stimulus. Bloomberg

Iron prices rose almost 20 per cent since the start of September to around $US120 a tonne, reaching six-month highs, before softening on Monday.

Ben Cleary, a portfolio manager at Tribeca Investment Partners, said he expects iron ore prices to remain at similar levels, or increase slightly over the next few months. “I can see prices continuing to hold if not increase into the year-end,” Mr Cleary said. “I’m in the more positive camp”.

“Over the last eight weeks Chinese policy has been incredibly loose and that’s flowing all the way down to steel mills and their customers,” he added.

But the surge in Chinese production is hurting BlueScope, Australia’s largest steel maker. The company’s chief executive, Mark Vassella, told analysts on Thursday that margins were under pressure. But it would be a “major structural positive” once China started curbing production, he said.

BlueScope shares have dropped 12 per cent in three weeks to $19.20.

“We’re in a cyclical industry. We understand that,” Mr Vassella said. “Of course the near term is important and spreads are terrible ... whilst we’re seeing some short-term volatility, China’s efforts to reduce over-production and emissions we think are major structural positives.”

China placed steel imports into Australia on the political agenda this week when Beijing suggested that it could end tariffs on wine if Canberra gave ground on a separate dispute over the alleged dumping of wind towers, railway wheels and steel sinks. However, Agriculture Minister Murray Watt said the government saw the two as “entirely separate matters”.

“We will continue our [World Trade Organisation] case when it comes to wine, and we will continue to defend the case when it comes to steel, but we hope that all of these things also be resolved by dialogue,” he said.

The dispute over imports comes as the latest analysis by BMI, a division of Fitch Solutions, concluded the outlook for steel was positive because there is an “anticipation of a turnaround in the property sector, with some form of stimulus from the mainland Chinese government”.

BMI said credit growth in China climbed 9 per cent year-on-year in August, versus 8.9 per cent in July, marking the first month-on-month acceleration since March. Commercial bank lending was up 11 per cent in August compared with the same period a year ago. Bank loans in August in China almost quadrupled from July’s level. It expects higher steel production growth in the December and March quarters.

But BMI expects that beyond 2024, global steel prices are set to remain on a downward trend, and “highlight the start of a paradigm shift in the steel market where ‘green’ steel produced at electric arc furnaces takes centre-stage at the expense of traditional steel produced at the blast furnace”.

Sanjeev Gupta’s Whyalla steelworks in South Australia shuttered its 55-year-old coking coal ovens in mid-September in readiness for a new $500 million electric arc furnace due to be running by late 2025.

BlueScope’s Mr Vassella pointed to the looming consolidation in the United States, where large Pittsburgh-based US Steel Corp is a buyout target. US Steel Corp has a sharemarket value of $US7 billion ($10.9 billion) and groups including Cleveland-Cliffs, Esmark and Canadian player Stelco Holdings have been scrutinising potential buyouts.

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