CHINA TWO SESSIONS: Mixed signals for steel market amid economic challenges

The government work report delivered by China's Premier Li Qiang on March 5 at the National People's Congress failed to excite steel market sentiment despite the announcement of additional fiscal stimulus and the historic mention of "stabilizing the property and stock markets."

Market sources were not convinced that the newly announced policy packages could improve domestic steel demand in 2025, while escalating global trade frictions raise concerns over declining overseas demand for Chinese steel and steel-intensive manufactured goods.

Meanwhile, China is also set to continue efforts to curb crude steel output and reduce steel capacity in 2025. Some market participants said that the government could issue some production control orders later in 2025, but, similar to the previous two years, how much production will eventually decline would be determined by steel demand, rather than government orders.

The property sector currently accounts for around 26% of the domestic steel demand, down from 37% in 2021, when it peaked, Platts data showed. About 27% came from infrastructure and 47% from the manufacturing sector.

Amid sluggish market sentiment, the Platts-assessed Chinese domestic rebar and hot-rolled coil prices both fell by Yuan 10/mt ($1.4/mt) on March 5 to Yuan 3,240/mt and Yuan 3,390/mt, respectively.

Demand side stimulus

In the government work report, China has made boosting domestic consumption a top priority for 2025, while intensifying fiscal and monetary measures to support infrastructure, property sectors, and the stock market.

"In the face of escalating trade barriers, particularly those from the US, China's export market may encounter greater challenges in 2025, so it's within market expectation that boosting domestic consumption is a priority for 2025," said a mill source.

"Enhancing household income expectations is the key to boosting domestic consumption, and stabilizing the property and stock markets will contribute positively to these income expectations......however, it remains to be seen how well the government efforts could improve the property and stock markets, and more importantly, I don't see much incremental steel demand coming from these efforts," he added.

Some market sources said stabilizing the property sector primarily involves maintaining home prices and sales, as well as ensuring the timely delivery of pre-sold homes.

But even if the home prices and sales could improve on a margin in 2025, new home construction starts, the crucial steel demand driver, are most likely to continue shrinking in 2025, against the backdrop of oversupply in the housing market, a decreasing population, and developers burdened with debt, said sources.

The government work report also emphasized the importance of controlling land supply for property development as part of the efforts to stabilize the housing market.

Meanwhile, China is also set to increase fiscal support—local government special bonds in particular—to support the infrastructure sector.

However, most market sources told Platts that infrastructure investment and its steel demand may still struggle to gather pace through 2025, as part of the fiscal stimulus would be used to pay down or swap local governments' existing debts, and in recent years, more fiscal funding has been skewed towards low steel intensive "new quality productive forces," such as AI, semi-conductors and new energy.

Despite China issuing Yuan 4.019 trillion of new local government special bonds in 2024, up from Yuan 3.956 trillion in 2023, the year-on-year growth of China's infrastructure investment still slowed from 5.9% in 2023 to 4.4% in 2024, data from the Ministry of Finance and NBS showed.

Supply side measures

Based on a draft released by the National Development and Reform Commission on March 5 during the National People's Congress, China is set to continue curbing crude steel production while promoting the consolidation of the steel industry in conjunction with capacity reduction.

The draft sets no specific targets for the production and capacity cuts.

Market sources expect China may cut its annual crude steel production in 2025 by 50 million mt, or 5%, on the year.

Some mill sources said they haven't seen an official announcement, and the market is more concerned about whether any government-mandated steel output cut orders can be strictly implemented this year.

Some trading sources said it would be challenging to implement such a move in 2025, as the country's economic woes continue.

Market sources said the market consensus, for now, is that China's crude steel output in 2025 is likely to fall 10 million-20 million mt on the year in tandem with falling steel demand, but a production cut of 50 million mt may impose a notable burden on some local economies.

Sources expected China's crude steel capacity to have reached around 1.3 billion by the end of 2024, and in the next five to 10 years, in tandem with falling demand, China's total steelmaking capacity may have to be cut by 20% in order for the industry to regain its health.

Reducing steel capacity is a must, but it will be a lengthy process, and it remains unclear how China would implement capacity reduction without hurting economic growth, sources said.