A worker monitors molten iron flow at a steel plant in Changzhou, China. |
China's pledge to cut crude steel output should bring relief to steelmakers struggling with soaring raw materials prices and demand suppressed by a COVID-19 shock.
China's steel industry faces a double-whammy. Raw material prices, especially iron ore and metallurgical coal, surged as steelmakers ramped up production after the end of the Winter Olympic air pollution controls. Steel demand and prices remain sluggish, however, as construction and manufacturing activities slowed amid China's worst COVID-19 outbreak. The average daily steel output of major mills rose to 2.2 million tonnes in mid-April, the highest level since June 2021, but apparent steel consumption dropped 9.5% year on year in the first quarter, according to industry body China Iron and Steel Association, or CISA.
Curbing raw material prices
It was supposed to be better for China's steelmakers in 2022. With the end of pollution controls and the Chinese government's decision not to tighten energy controls, companies expected to crank out plenty of steel to feed what many hoped would be large-scale infrastructure projects and a bottoming out of the property sector.
To sustain GDP growth, major steelmaking hub Hebei province eased restrictions on steel production after the Winter Olympics ended in late February. The market predicted a strong production resumption, driving raw materials high, Wang Siwen, metals analyst at Shenzhen-based Hundun Tiancheng Futures, told S&P Global Commodity Insights on April 21.
But iron ore traders and producers, anticipating the increased demand, jacked up their prices, and metallurgical coal prices have risen on higher demand, hurting steelmakers' margins.
China's spot seaborne iron ore price rose 25.9% to $150.5 per tonne from the beginning of 2022 to April 22, while the domestic metallurgical coal index compiled by consultancy Mysteel has risen by 41% to 2,821.7. The steel index compiled by CISA rose less than 8% during the same period.
In the first quarter, total net profit of CISA-member steelmakers dropped 25.8% to 55.3 billion Chinese yuan from a year ago, Qu Xiuli, vice chairperson of CISA, told a news conference on April 25. Qu expects China's steel industry to see weaker earnings performance for 2022, despite a smaller decline in the second half.
NDRC's decision to reduce steel output could depress raw material demand and prices, which would relieve steelmakers' cost pressure, Wang Guoqing, head of the Beijing-based Lange Steel Information Research Center, told Commodity Insights on April 20.
Not enough buyers
Steel demand is still muted after the new COVID-19 outbreak disrupted construction and manufacturing activities. Finished steel inventories have piled up as local governments' anti-coronavirus measures disrupt transportation, which also depresses steel prices, said Wang of Hundun Tiancheng.
Steel inventories held in major mills rose to 19.7 Mt in mid-April, the highest since March 2020 — when China was experiencing the initial outbreak of COVID-19 — according to CISA.
In the first quarter, real steel consumption from the construction industry, including property and infrastructure sectors, dropped 7% year on year, while consumption from the manufacturing industry fell 2%, CISA's Qu said.
Steel demand is expected to recover in the second half, as the central government is likely to unleash more stimulus to counter economic headwinds amid geopolitical tensions and COVID-19 shock, Lange's research showed.
However, the overall crude steel consumption is expected to fall in 2022, due to the downturn in property sector, which accounts for 40% of total steel demand, China International Capital Corp. analysts Wang Zhilu and Guo Chaohui said in an April 20 note. The investment house projects China's new construction starts to fall by 20% to 40% this year.
China's policies to stabilize economic growth could boost infrastructure sector, but it is difficult to offset falling demand from the property market. Meanwhile, the COVID-19 resurgence in China also affected consumption and exports, which would further weigh on steel demand, Hundun Tiancheng metal analyst Xu Yanyan said on April 21.
Improve margins to reverse losses
"Many steelmakers are facing that the more they produce, the more they lose," said Wang of Lange Steel. Against this backdrop, the only way to improve earnings is to increase their margin, Wang said.
Around 25% of 247 Chinese steel mills with blast furnaces weren't generating a profit, according to Mysteel's survey during the week of April 22, as compared to less than 10% a year ago. Only 31 out of 75 surveyed electric-arc-furnace steel mills were profitable, Mysteel said.
The output cut could prevent steelmakers from reckless expansion, Hundun Tiancheng's Wang said.
S&P Commodity Insights expects China's crude steel production to fall by 2% to 1.01 billion tonnes in 2022 — dragged down by economic slowdown and continued decarbonization-related production restraints — with the NDRC's latest call to cut steel supply, principal analyst Ronald Cecil wrote on April 22. It's expected to translate into a 6-Mt year-over-year decline in Chinese iron ore imports to 1.12 billion tonnes in 2022, Cecil said.
Crude steel output dropped by nearly 16% in the second half of 2021 after the central government pledged to cap steel output to meet the country's carbon emission goals. China's crude steel output declined 10.5% to 243.4 Mt in the first quarter, according to the National Bureau of Statistics of China.
As of April 25, US$1 was equivalent to 6.56 Chinese yuan.
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