Key Takeaways
- A weak property sector and moderating growth in infrastructure investment will keep China's steel demand sluggish in 2025.
- Oversupply will persist despite a modest decline in steel production. The trade environment may turn less friendly, narrowing prospects for exports to digest excess supply.
- That said, we expect a moderate recovery in steel spreads on stabilizing steel prices after two years of sharp drops, and declining costs for raw materials.
- Rated steelmaker China Baowu Steel Group Corp.'s leverage will gradually level off on cuts in capital expenditure, improved steel spreads and a stronger product lineup than peers.
China's steel sector faces another year of sluggish domestic demand and narrowing options to ease the pain via exports. Nonetheless, steel spreads are stabilizing, a sign that the sector is gradually adjusting to downcycle conditions.
Domestically, weak recovery prospects for property and moderating growth in infrastructure investment will keep steel demand tepid. Exports will be a less-effective escape valve, given rising global trade protectionism.
S&P Global Ratings expects a focus on higher-value-added products, and some cutbacks in China's total production will help stronger players in the sector. But overall, the sector remains oversupplied.
Muted Prospects For Two Key Pillars Of Domestic Steel Demand
We expect China's domestic steel consumption to decline by 1% in 2025. This is narrower than our estimated 2% fall in 2024, mainly due to a less-aggressive drop in demand from property, a key pillar of steel consumption (see chart 1).
While better than last year, steel demand from the property sector will likely fall 6.5% in 2025 and be the main drag (see chart 2). Growing demand from the manufacturing industry, such as auto, energy, and shipbuilding, will partially alleviate overall demand weakness.
Our expectations mirror forecasts from S&P Global Commodity Insights.
Chart 1
Chart 2
An increasing share of secondary-market residential sales and declining reliance on the presale model will pressure new construction starts for residences. This in turn will prolong the demand weakness for construction steel products and keep their prices under pressure (see chart 3).
We expect China's property market might stabilize toward the second half of 2025. But that will depend on the government's continued support for funding conditions for developers and efforts to reduce inventories (see "China Property Watch: Charting A Path To Stabilization," published on RatingsDirect on Oct.17, 2024).
Chart 3
We anticipate infrastructure spending will stay substantial, to meet national strategies on strengthening the transportation system, energy transition, and disaster prevention and post-disaster reconstruction.
Chart 4
That said, the central government will balance these needs against targets on fiscal discipline. This is illustrated by increasingly selective approval for new projects. Moreover, authorities have mandated the most highly indebted local governments to prioritize resolution of debt risk.
A Modest Decline Of Steel Production Won't Be Enough To Fix Imbalances
Steel production should decline in 2025 as the mills respond to narrow profit margins. This will be coupled with increased government oversight on production control, including cuts for environmental reasons, and suspension of steel capacity replacement.
Nevertheless, oversupply will linger. S&P Global Commodity Insights forecasts steel production will decrease by 1.0% year on year to 996 million metric tons (mmt) in 2025 (see chart 5). Steel consumption will be less than 900 mmt this year. The decline in production won't be enough, in other words, to combat weak consumption.
Chart 5
Exports Will Moderate On Trade Restrictions
China will encounter more confrontations on trade exports. The effects of anti-dumping measures on China-origin steel products among the top importers, mainly from Southeast Asian countries, will likely emerge in 2025 onwards. Investigations that were initiated by the major importing countries last year will generally take 12-18 months to finish.
S&P Global Commodity Insights forecasts exports in 2025 will fall by 12% to about 97 mmt (see chart 6) but remain high by historical levels. Exports in 2024 surpassed 100 mmt, the first time since 2016.
Chart 6
Modest Improvement In Steel Spreads From 2025
We anticipate steel spreads will widen modestly on stabilizing steel prices after two years of sharp drops (see chart 7). Declining costs for raw materials such as iron ore and metallurgical coal will also support margins.
High-end steel products should see better price resilience. The profitability of companies with a larger portion of advanced products will recover better than peers that mainly produce construction-related products. This is due to better demand prospects in the downstream sectors for these premium products, such as new energy vehicles, new energy, and infrastructure projects.
Baowu (A-/Stable/--) should be able to enhance profitability in the next two years. High-end steel products (such as auto plates, silicon steel) make up around 40% share of the company's portfolio.
Chart 7
Baowu's Leverage Will Gradually Level Off
In response to the prolonged industry weakness, Baowu will significantly reduce its annual capital expenditure (capex). By our projection, capex will fall to about Chinese renminbi (RMB) 35 billion over the next two years, from RMB51 billion in 2023. The spending will focus on constructing and upgrading high-end steel facilities and reducing carbon emissions.
The company's operating cash flow year in 2025-2026 will likely cover the capex, enabling the company to reduce its debt. We forecast Baowu's ratio of debt-to-EBITDA ratio will improve to 2.7x-3.1x for 2025-2026, from our estimate of about 4.0x in 2024 (see chart 8).
Chart 8
China's Tightening Environmental Policies Could Drive Out Weaker Steel Players, Benefitting Survivors
Growing environmental costs might eliminate weaker steelmakers, easing oversupply and improving industry dynamics.
In our view, Baowu and its flagship subsidiary Baoshan Iron & Steel Co. Ltd. (A-/Stable/--) have better capacity than peers to invest further in technological upgrades to lower emissions and save energy. The group also has a sharper technological edge in developing alternative steel manufacturing procedures that have lower carbon emissions, including the electric arc furnace (EAF) and hydrogen-enriched carbonic oxide recycling oxygenate furnace (HyCROF).
This competitive advantage will keep accruing for Baowu. For example, the group will likely benefit when steel production is included into China's national carbon emission trading scheme starting this year. After the quota allocation plan is officially released, steel companies may face additional costs pressure for purchasing carbon emission quotas, optimizing production processes, improving energy efficiency, improving energy use structure and logistics systems to reduce carbon emissions. This adds another burden for weaker players already struggling with the current prolonged downcycle. It could be the final straw for some.
Related Research
- China Baowu Steel Group Corp. Ltd. And Baosteel Resources International Co. Ltd., Dec. 9, 2024
- Baoshan Iron & Steel Co. Ltd. And Bao-Trans Enterprises Ltd., Dec. 9, 2024
- China Property Watch: Charting A Path To Stabilization, Oct.17, 2024).
- S&P Global Ratings Metal Price Assumptions: Prices Hold Steady Despite Headwinds, Oct.16, 2024
- Trade Tensions Won't Tarnish China Steel Exports, Oct. 15, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Crystal Wong, Hong Kong + 852 2533 3504; crystal.wong@spglobal.com |
| Annie Ao, Hong Kong +852 2533-3557; annie.ao@spglobal.com | |
| Secondary Contact: | Danny Huang, Hong Kong + 852 2532 8078; danny.huang@spglobal.com |
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