China's steel margins pressured by higher output, slow demand recovery

China's steel prices and margins saw increased pressure in early April from continued higher production and a slow recovery in demand following the country's most recent surge in COVID-19 cases over December 2022-February. Output had risen steadily on the year through most of the first quarter and market participants now expect it to slow down mildly in late April due to the poor margins, and support prices.

However, most market sources S&P Global Commodity Insights spoke to expect China's steel demand recovery to remain weak and uneven for the rest of 2023, despite robust credit expansion and a slight improvement in home sales in March.

Higher steel output

China's daily pig iron and crude steel output stood at 2.476 million mt and 2.988 million mt, respectively, over April 1-10, up 1.02% and 1.25% from the period of March 21-31, according to data from China Iron & Steel Association (CISA) that did not include year-on-year changes.

The National Bureau of Statistics reported that China's crude steel output in January-February increased by 5.6%, or almost 9 million mt, from the same period in 2022.

Market participants said they expect the year-on-year growth rates of pig iron and crude steel output in March and at least in early April to be about the same as levels in January-February.

Finished steel inventories at steel mills monitored by the CISA increased 6.2% from March 31 to 18.32 million mt April 10, although they were still 0.9% lower on the year.

The Chinese domestic rebar and hot rolled coil profit margins in the first 13 days of April averaged negative $19/mt and negative $22/mt amid high steel output, down from $65/mt and $60/mt a year earlier, respectively, according to S&P Global data.

Mill sources said most mills, especially whose end-users were mainly in property and related sectors, were currently under pressure due to high inventory, poor margins and low demand.

Although home sales showed some improvement in some major cities in March, China's new home construction starts, a major driver of steel demand, are still a long way from being fully recovered, they said.

Weak support from credit expansion

China's newly issued mid-to-long term Yuan loans to households, mainly for buying homes, hit an all-time high at Yuan 634.8 billion ($92.67 billion) in March, showed data from People's Bank of China.

The strong household credit expansion was in line with the recovery in home sales. The floor space of home sales in 30 major cities increased 44% on the year in March, although it remained about 4% lower than in the same period of 2019, according to local media reports.

However, a key factor behind the improved home sales was delayed demand from late 2022 and early 2023 when China was hit by an unprecedent wave of COVID-19 infections, and therefore the improvement might not be sustainable, participants said.

They expected home sales in tier one and some strong tier two cities to slowly recover through 2023, but most smaller cities to see the property market continue to struggle with housing oversupply and high debts of developers.

Moreover, the key tasks for most developers in 2023 remain deleveraging and delivering pre-sales on time, and the new home construction starts are unlikely to recover at least in 2023, steel market participants said.

Sources said that the mid-to-long term new loans to corporates were also strong in March, rising 54% on the year to Yuan 2.07 trillion.

A Shanghai-based analyst said that the growth in corporate loans was driven mainly by large state-owned companies and the issuance of local government special bonds. As a result, China's infrastructure investment and its steel demand was expected to remain strong in the coming months.

However, some mill sources said that improved infrastructure steel demand was unlikely to fully offset the slowdown in the property sector as consumption in property and related industries was about twice as much as in infrastructure.

"In fact, China's household consumption is also directly or indirectly driven by property investment, so the property sector has had an almost decisive influence on China's steel demand. So it's not difficult to draw a conclusion of a weak recovery in steel demand this year," a mill source said.

China will continue to cap its crude steel production in 2023. But market sources expect any government-mandated steel output cuts to be modest this year, generating limited support for steel prices.