Chinese steel mill margins have deteriorated to their most negative levels since the 2024 steel crisis. The rebar margin of -80 CNY/mt reflects continued weakness in construction demand, while the HRC margin of -50 CNY/mt reflects competition from import semi-finished steel. Loss-making capacity rose to 35%, up from 25% in May.
The margin environment is expected to trigger significant production cuts in July. Industry estimates suggest Chinese crude steel output could decline by 5-8% month-over-month in July, which would reduce iron ore demand by approximately 5-7 million tonnes per month. The China Iron and Steel Association has not issued formal output guidance but has signaled support for voluntary cuts.
The electric arc furnace (EAF) route is more severely impacted. EAF margins are at -150 CNY/mt, reflecting high scrap prices. Scrap is trading at a 200 CNY/mt premium to the BOF scrap-equivalent cost, making EAF production uneconomic at current steel prices. EAF utilization has already dropped to 45% from 55% in May.
On the positive side for demand, Chinese pig iron output has held up at 2.1 million tonnes per day, supported by low-cost integrated mills that continue to produce despite negative margins. These mills are resisting output cuts to maintain market share and keep their blast furnaces operational, as restarting a cold furnace is expensive.
The looming output cuts are bearish for iron ore in the near term. Buyers should defer spot cargo commitments and target $95-98/mt for July delivery. The negative margin environment cannot persist indefinitely without significant production adjustments. The cut magnitude is the key variable for iron ore pricing in H2 2026.