Spotlight on China steel: Pig iron, crude steel output to ease in 2020

China's pig iron and crude steel production growth are expected to slow to 1.7% year on year and 2% year on year, respectively, in 2020, equivalent to an additional 14 million mt of pig iron and 20 million mt of crude steel, according to S&P Global Platts analysis.

Incremental pig iron and crude steel production in 2020 will mainly come from new facilities commissioned in the second half of 2019 and in first-half 2020.

The slower rate of steel production growth, compared with last year's increase of 7% year on year, is due to lower capacity expansion in 2020, and because steel capacity utilization rates will likely stay at a similar level to 2019 this year.

Related: China's new crude steel capacity expansion slowing in 2020

Curbs on steel production to lower emissions have been relaxed since the start of 2019. Therefore, the adverse impact of environmental protection measures on iron and steel capacity utilization rates have become marginal, leaving little room for capacity utilization to rise further in 2020.

If China eases some restrictions around home buying and property financing in 2020, demand from property construction, the most important segment for steel consumption, could drive utilization rates higher, lifting pig iron and crude steel output growth rates above 1.7% and 2%.

However, this scenario is not likely, as Beijing wants to stabilize the property sector, rather than see it overheat further.

A decline in China's pig iron and steel output is an unlikely scenario for 2020, unless steel mills suffer from serious financial loss due to a demand recession in the construction and manufacturing sector, the two main economic growth engines. But a slowdown in construction -- property and infrastructure combined -- or any further recession in manufacturing is the last thing China's policy makers want for 2020.

China's Political Bureau, or Politburo, has made stabilizing economic growth and achieving all of the development goals set out in the 13th five-year plan (2016-2020) the top priority in 2020. In tandem, more supportive fiscal and monetary policies are expected in first-half 2020 in a bid to stabilize the property sector, and to further support infrastructure and manufacturing.

Of all the new crude steel capacity commissioned in 2019 and 2020, approximately 37.6% in 2019 and 39.8% in 2020 will be feeding flat steel works, while the balance will go to long steel works. Therefore, the long steel market will be under greater supply pressure than flat steel in 2020. The average profit margin of Chinese domestic commercial grade hot-rolled coil through 2020 is likely to surpass that of rebar.

According to Platts analysis, hot-rolled coil margins averaged $34/mt and rebar averaged $62/mt in 2019. HRC was sold at below cost at times last year due to soaring iron ore prices and the downturn in manufacturing demand.

This is a five-part series discussing S&P Global Platts views on Chinese steel production, its capacity replacement mechanism, electric arc furnace development, scrap usage outlook, and the downstream demand drivers in 2020. We expect steel production growth to soften this year as net capacity increases slow. Demand should be stable, supported by robust property construction. More from this series:

• Scrap consumption, supply growth to be modest in 2020
• China's new crude steel capacity expansion slowing in 2020
• Property construction to generate stable demand in 2020