Analysis: China's property steel demand could post first decline in 6 years in 2021

Singapore — China's efforts to take the heat out of its property market in 2021 could result in the first decline in steel demand from the sector in six years, according to S&P Global Platts Analytics.

China has tightened its monetary stimulus measures and clamped down on property sector financing since mid-2020. Beijing insists that houses should not be used for speculative purposes. A major plank of its 14th five-year plan is to put more money into the hands of consumers in order to boost domestic consumption, and one way of achieving this is to deleverage the property sector. More cash means more spending, the thinking goes.

Platts Analytics presents two scenarios for property steel demand, both of which indicate there will be no growth from the sector this year. (See table below.)

An upper range scenario would see the addition of just 6.07 million mt of steel compared with 2020, marking a 1.9% increase to 328.2 million mt. Platts Analytics' lower range estimate sees a decrease of 8.68 million mt to 313.4 million mt, marking a 2.7% fall.

The last time steel demand from the property sector declined was in 2015. Property accounts for 30%-35% of China's total steel consumption.

Based on S&P Global Ratings' forecast that China's GDP will grow 7% this year, property new starts and sales in 2021 will be down by 6.4% and 2.8% year on year, respectively.

If China chases GDP growth of 8% or above, property new starts and sales will be up 0.4% and 4.6% on year, according to Platts Analytics.

Achieving 8% growth would require looser credit conditions and even some easing of constraints on the property sector.

Best case scenario: Flat demand growth

But a best case scenario for steel consumption, of an extra 6.1 million mt in 2021, is negligible compared with the year-on-year increase of almost 23 million mt in 2020. Platts estimates property steel demand in 2020 was 322.1 million mt, up 7.6% from 2019.

The property sector played a vital role in driving up China's crude steel production in 2020, while keeping steel profit margins robust.

China's crude steel output rose 5.2% on year, or by 52 million mt, to 1,053 million mt in 2020, breaching 1 billion mt for the first time. This was despite the fact that China was in lockdown for much of the first quarter, with construction wors suspended.

Chinese domestic rebar sales margins fell 25% on year, but still averaged at a decent $46/mt, according to Platts Analytics.

China's steel production capacity will continue to grow in 2021 to 1,285 million mt/year, up from 1,257 million mt/year at the end of 2020. The country's steel output is forecast to rise by 2.8% on year, or by 29 million mt, to 1,082 million mt in 2021.

Steel supply and demand will be roughly in balance in 2021 if property steel demand achieves the upper end of Platts' estimates. Infrastructure and manufacturing steel demand will also grow modestly.

The concern is if property steel demand only reaches the lower end. This could lead to the reemergence of steel overcapacity in the long products market, especially in the second half of 2021. This in turn could result in a reduction in steel production, or a lift in steel exports.

Tighter monetary policies to bite in H2

Property sales and new starts are likely to stay robust in the first half of 2021, as fiscal and monetary stimulus released in 2020 will continue to generate some upward momentum in early 2021. The tighter policies introduced mid-2020 will take up to one year to work their way through the market.

There has already been some downward pressure on property sales this year. This is mainly due to the fact that over 2016-2020, the sector was overstimulated. China's shanty town renovation enabled billions of cash lent by the China Development Bank to be injected directly into the property market in 2016-2017. Local government bonds also found their way into property, particularly in early 2019. Over 2018-2020, the property sector was again used for stimulus to offset the economic slowdown brought about by China-US trade tensions and then the coronavirus pandemic.

Property sector stimulus over 2016-2020 led to a rebound in property sales growth at a time when it should have been on a downtrend. This is because urbanization tends to slow down when the rate approaches 60%, according to the experiences of developed countries. China's urbanization rate reached 57.4% in 2016 and breached 60% in 2019. Also based on historic data, China's property sales growth in five-year averages was on a downtrend over 2000-2015 as the urbanization rate rose. (See chart.)

Urbanization has been the core driver of China's property development and steel consumption over the past 20 years. But urbanization typically becomes less steel intensive, particularly after the rate breaches 60%.

China's urbanization is on track to hit 70% by 2030. This indicates that demand for construction steel may be close to – or may even have already reached – its peak.

China's steel demand from the property sector:

Source: S&P Global Platts Analytics, NBS