China's newly commissioned iron and steel capacity add to supply pressure

China's steel production continues to show a modest decline despite steelmakers facing poor profit margins, on the back of new pig iron and crude steel capacity launched in recent months, while a lack of any large-scale output cuts is failing to add pressure on production.

Northern China, home to large steelmakers, could see winter output cuts from mid-November, especially in the Hebei steel hub, market sources said.

But these curbs are expected to remain smaller than the previous year, they added.

Steelmakers in China typically are ordered to reduce production during the winter to cut back on pollution.

Setting a bearish tone for steel prices, there are also several new pig iron and crude steelmaking facilities coming online, which could partly offset the impact of any government-mandated output cuts for 2022 and 2023, according to sources.

"I'm afraid steel production will remain high this winter compared with subdued demand, so any price uptick in the rest of 2022 may be limited, unless more stimulus packages are announced," a market participant in eastern China said.

Rising pig iron and steelmaking capacity

During August-October, China commissioned about 6.4 million mt/year of new blast furnaces and 4.8 million mt/year of crude steel making capacity through capacity swaps, S&P Global Commodity Insights calculations showed.

Because some of the replaced facilities were already closed during 2017-2020, these newly commissioned facilities will in theory lead to a net increase of 2.5 million mt/year of pig iron and 3 million mt/year of crude steel capacity for 2022, according to the calculations based on industry data.

In the first 10 months of 2022, a total of 28.8 million mt/year of new pig iron making capacity and 23.1 million mt/year of crude steel making capacity were brought on stream in China through capacity swaps, leading to a net increase of 8.3 million mt/year pig iron and 6 million mt/year crude steel capacity for 2022.

Although poor steel profit margins have recently forced some mills in the Shanxi and Shaanxi provinces to trim production, these newly commissioned facilities have partly offset the cuts in China's overall steel output.

Some mill sources in northern and eastern China also said that with these newly-added capacity and most mills still refusing to cut production despite current losses, China's crude steel output in October and so far November might stay almost the same as in September.

China's daily crude steel output in September was about 7% higher on the month and 17.6% higher on the year, according to China's National Bureau of Statistics.

On Nov. 3, amid languishing steel demand and bearish market outlook, the Chinese domestic rebar and hot rolled coil sales profit margins fell to minus $33/mt and minus $46/mt, respectively, S&P Global data showed.

Though some mill sources S&P Global talked to expected Hebei to launch winter output cuts around mid-November, which could ease the supply glut and support steel prices.

Oversupply may persist

However, with China's debt-laden property sector and sluggish domestic consumption unlikely to generate much incremental steel demand for 2023, the Chinese steel market may remain under oversupply pressure for a longer term, especially as more iron and steel making facilities will keep coming on stream, according to sources.

For the rest of 2022 and whole 2023, Chinese steel makers plan to bring a total of 116 million mt/year of new pig iron capacity and 143 million mt/year of new crude steel capacity on stream through capacity swap mechanism, according to an analysis of industry data.

Although net capacity growth will be minimal for these swaps, these new facilities will be generally more efficient and greener than their replaced ones, and thus any government-mandated output cuts for the purpose of environmental protection or decarbonization would have less impact on their production.