Commodities 2023: China likely to tone down domestic steel capacity, targets ASEAN nations

China would aim to contain its steel production growth in 2023 and focus more on environmental-friendly capacity swaps, but it remains keen on making capacity investments in ASEAN countries to keep its behemoth steel industry running, information gathered from sources by S&P Global Commodity Insights show.

In 2022, China commissioned about 30 million mt/year of new blast furnaces and 25 million mt/year of crude steel making capacity through capacity swaps, S&P Global calculations showed.

As some of the replaced facilities were already closed during 2017-2020, these newly commissioned facilities likely led to a net increase of 5.4 million mt/year pig iron and 5.3 million mt/year crude steel capacity for 2022.

Due to distressed steel demand both at home and overseas, there are still many uncompleted new iron and steel making projects in 2022.

With projects postponed from 2022 and more planning for 2023 commissioning, Chinese steel makers will bring up to 118 million mt/year of new pig iron capacity and 141 million mt/year of new crude steel capacity on stream in 2023 through capacity swap mechanism.

As a result, these projects' commissioning will add a net increase of 12 million mt/year pig iron and 18 million mt/year crude steel capacity to China's steel industry in 2023, according to S&P Global calculations.

"China's steel demand is likely to continue falling in 2023 due to slowed demand both home and abroad, so the commissioning of these new steel projects will put a lot of pressure on the market trends, if most steel makers do not put their production under control," a mill source said.

However, whether the decline in steel output could be large enough to offset the pressure from slowed demand is hard to predict, a market participant said, adding that Beijing has put economic growth as top priority for 2023 so that any government-mandated output cuts could be mild.

China's crude steel output is likely to reach 1.011 billion mt in 2022, down 2.3%, or 24 million mt, from 2021, S&P Global calculations based on data of National Bureau of Statistics and China Iron & Steel Association showed. It will be the second-successive annual decline in 2022.

The drop in steel demand has turned out to be bigger than the decline in steel output in 2022 due to the property sector's debt crunch and on-and-off COVID-19 outbreaks across the country.

As a result, in the oversupplied market, the Chinese domestic rebar sales margin, an indication of the steel market performance, fluctuated from $129/mt in early February to minus $80/mt in mid-June and to just $1.7/mt in late December, according to S&P Global data.

"I think downward pressure on the steel market will be greater in the first half of 2023 than in the second half," another market participant said.

"It's not only because the major steel demand drivers – property and domestic consumption, may continue downward at least in early 2023, but also steelmakers will usually boost their production in spring before reducing steel output in summer and winter."

Oversupply probably will persist in the Chinese steel market for much of 2023, but China's steel exports may remain languish at least in the first half of 2023, as global buyers battle a tight inflationary environment, some Chinese steel exporters said. Some of the sources expected China's total steel exports in 2023 to be lower than in 2022.

Downstream recovery

China's new home sales, the major channel to fund property projects, may start recovering in mid- to late 2023 due to a lower base this year and a plethora of stimulus packages that the government had injected into the sector since the second half of 2022, according to some steel market participants.

However, all the market sources S&P Global spoke to expected the new home starts, the most important steel demand driver in China, to continue falling through 2023, undermining the post-COVID-19 recovery in the Chinese steel market. However, they believed the decline in property steel demand would be smaller from 2022.

China's new home starts fell by 38.9% on the year over January-November, while new home sales value fell by 26.6% on the year over the same period, according to National Bureau of Statistics.

Adding to the headwinds in the property sector, China's manufacturing sector is also likely to continue to be hit by a slowdown in property construction and domestic consumption, as well as languishing overseas demand.

"Shrinking overseas demand should be the biggest adverse impact on manufacturing and its steel demand in 2023, while I believed domestic consumption and construction-related manufactured goods are unlikely to have much improvement in 2023 either," a mill source said.

Fortunately, China's infrastructure construction would continue to improve in 2023 and is likely to maintain at or even slightly above November's rates, some sources said. The year-on-year growth in China's infrastructure investments reached 10.6% in November.

China's steel market may remain under big pressure in the first half of 2023 given poor steel demand and comparatively high steel production. However, most market sources believed steel demand in the second half of 2023 to improve from a year ago and the first half of 2023, although it might not be able to rebound to late 2021 level.

"Besides the hit from property's debt crunch and shrinking overseas demand, the core problem with the recovery in steel demand is that both enterprises and consumers lack confidence about the future, and it takes time, a quarter or maybe half year, and more stimulus policies to restore confidence after the current wave of COVID-19 spreading is over," a mill source said.

Eyes on ASEAN

Despite the challenges faced by China on the domestic front, the country is still looking at making investments in ASEAN countries in 2023.

For 2022, steel demand in ASEAN is expected to reach 77.9 million mt, up about 3.5% from 2021, data from the Southeast Asia Iron and Steel Institute showed.

Amid the projected increase in demand, future supply is expected to exceed demand if new steel projects come online in Indonesia, Malaysia and Vietnam, estimated at 90.8 million mt in the coming years, reaching about 162.6 million mt in 2030, SEAISI's projections showed.

SEAISI said a majority of the new steel plants in ASEAN are China-backed to sell the steel back to China.

Fresh China-backed steel projects emerged toward the end of 2022, the latest being Esteel Enterprise, which plans to build an MR19.65 billion ($4.46 billion) "green" steel plant at Sipitang, Sabah, Malaysia, by 2025.

Phase one is expected to begin over the third quarter of 2023 and will involve the building of a 2.5 million mt/year hot-briquetted iron plant. For phases two and three, two direct reduced iron plants of 2.5 million mt/year output each will be built.