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In this paper we examine the impact of improving capacity utilisation on domestic steel prices. Prices and margins improve, but why?

Part of the answer lies in changes in marginal cost of production. This relationship is independent of any change in steelmaking raw materials costs, and any other input cost for that matter. When capacity utilisation is sustained above 85-90%, the pricing regime begins to shift, disassociating from costs and carrying potential to build margins beyond levels changes in marginal costs alone would imply. Our latest view of capacity utilisation implies that China is approaching this threshold.

Higher capacity utilisation offers fundamental support to domestic steel prices
CRU forecasts ongoing increases in Chinese crude steel capacity utilisation as spare capacity is cut further. Our domestic steel price forecasts have been upgraded, and with them, expectations of industry profitability. But why should this be the case – why is there any relationship between capacity utilisation and steel price in the first place?

Impact beyond costs hikes
Rising Chinese capacity utilisation rates imply higher marginal cost of production for domestic steelmakers. Increasing carbon crude steel capacity utilisation, from 84.7% in 2017 to 89.4% in 2020/21 in our latest data, implies an increase of up to $10 /t in marginal costs over this period.

This will provide support domestic steel prices, above and beyond any movement in input costs. In addition, Chinese steel prices have the potential to disassociate from costs, providing further price and margin upside.

Read the full story: http://bit.ly/China-steel-price-uplift

Read more about CRU: http://bit.ly/About_CRU

About CRU
CRU offers unrivalled business intelligence on the global metals, mining and fertilizer industries through market analysis, price assessments, consultancy and events.

Since our foundation in 1969, we have consistently invested in primary research and robust methodologies, and developed expert teams in key locations worldwide, including in hard-to-reach markets such as China. CRU employs over 250 experts and has more than 10 offices around the world, in Europe, the Americas, China, Asia and Australia – our office in Beijing opened in 2004.

When facing critical business decisions, you can rely on this first-hand knowledge to give you a complete view on a commodity market. And you can engage with our experts directly, for the full picture and a personalised response.

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SOURCE CRU

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