Industry expects China to announce 2%-3% reduction in 2022 crude steel output

China is likely to announce a 20 million-30 million mt, or 2-3% year on year, decline in its steel output cut target for 2022 in July, according to industry sources.

The steel output cuts at this level may not provide much upside momentum to the Chinese steel market, as annual steel demand, undermined by debt-strapped property sector, may drop even faster.

Some sources expect Chinese steel prices to continue to fluctuate in the second half of the year but in a narrower range than in H1.

China's annual steel demand in 2022 would drop at least 5% on the year, which means in order to lower steel inventories and give a real boost to steel prices, China has to reduce its annual crude steel output by around 50 million mt on year, some sources said.

"But it is impossible for China to target anywhere near 50 million mt of annual crude steel output cuts, as that will trigger unemployment and put great downward pressure on GDP growth," a source said.

If China sets to reduce its crude steel output in 2022 by 20 million mt to 30 million mt on year, its annual crude steel output will decline to around 1.005 million mt to 1.015 million mt. That means the average daily crude steel output during June-December will be around 2.665 million mt to 2.711 million mt, down 13% to 14.5% from May's daily level, but still 1.4% to 3.2% higher than in the same period of 2021.

Some market sources said China's crude steel output already retreated in June, and the decline in steel output will accelerate in July, as currently most steel mills are already in lossmaking and steel inventories at both mills and spot market are high.

Steel output cuts in July will stop steel prices from falling further or even trigger some upward corrections, but they will remain too modest to really reverse the downward trend due to poor steel demand, according to the sources.

Steel demand in manufacturing and infrastructure sector has gradually improved since June, but the slowdown in property-related steel demand has been too steep and is also unlikely to improve at least in the third quarter.

China's property sector, the most important steel demand driver in China, may see its home sales and investment bottom out in the third quarter, according to some market observers.

However, even if new home sales begin to increase on a yearly basis in the fourth quarter, developers will divert most of the money on securing project completions rather than launching new home starts, which will benefit commodities like glass or copper but not steel.