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Investing.com - Media reports have suggested that China may be looking to slash some of its domestic steel supply, presenting a possible boon to global markets of the metal, according to analysts at UBS.
A surge of Chinese steel exports, due in part to weak internal demand as the country grapples with a protracted property crisis, have deflated global prices in recent years. Several countries, including the European Union and South Korea -- have implemented measures designed to safeguard their own steel industries from these pressures.
But, the UBS analysts flagged, reports have indicated that China may be eyeing a drawdown in its steel capacity, with government officials said to be telling mills in the region of Tangshan to reduce sintering output by roughly 30% between July 4 to July 15.
The move could bring daily sinter output down by about 30,000 tons, the analysts added. Sintering refers to the key metallurgical process of using heat to turn powdered steel particles into a solid mass.
Although the UBS analysts predicted that "[t]he near-term impact from the sintering output cuts will be limited," they argued it "shows that the government is willing to implement some supply side cuts, raising market expectation that broader steel capacity cuts may be coming."
Meanwhile, Chinese President Xi Jinping also emphasized in a speech earlier this month that domestic steelmakers need to be guided to improve product quality and phase out outdated capacity in an orderly manner.
"If implemented, this reform could be very positive global steel markets, particularly if they help curb China’s export volumes," the analysts said in a note.
However, a fragile trade truce between the U.S. and China, along with "pushback" from steel mills, may mean that the such capacity cuts are not imminent, the analysts said. Chinese exports remained elevated in the January to May period, up 9% year-over-year to 48.5 million tons, they noted.
While the market awaits more clarity on the trajectory of Chinese steel capacity, the analysts said they prefer stocks with exposure to regions that have implemented "relatively effective safeguard measures" and have "demonstrated margin resilience." These include Nucor (NYSE:NUE), Steel Dynamics (NASDAQ:STLD), Gerdau, and SSAB.