Chinese steel mill owners are in a bad mood as demand suffers

Steel mill owners in parts of China are in a bad mood, said Beijing-based commodity consultant Simon Wu.

Steel inventories are slowly piling up in warehouses in the country’s biggest steel hub, the northeast city of Tangshan, as well as in Jiangsu and Shandong provinces, owners said. factories in Wu, senior consultant at Wood Mackenzie.

Steel demand is plummeting amid pandemic shutdowns and crippled construction activity, they said.

“There is negative energy everywhere. The steel industry is just not making any profit,” Wu said.

Much of the steel – a key raw material in the manufacturing powerhouse – sits idle across the country amid a stalled economy that is driving down demand and prices.

Prices for steel and its main ingredient, iron ore, were volatile during Shanghai’s lockdown, but headed on a downward trajectory at the start of the month.

Weak demand for steel, an indicator of China’s economy, also reflects the country’s general slowdown, although recent data points to some improvement, with industrial production up slightly by 0.7% in May from last year. a year ago.

Basically, China’s steel industry – the largest in the world – hosts vast supply chains that stretch from Chinese blast furnaces to overseas iron ore mines in Australia and Brazil, the biggest suppliers of iron ore to China.

For this reason, any unrest in China can unravel a vast network of supply chains, which could add to the pressures on existing global disruptions.

A worker cuts steel pipes near a coal-fired power plant in Zhangjiakou, China, November 12, 2021. The country’s biggest steel consumers and its engines of economic growth – such as building construction and development infrastructure – fell silent, according to an analyst.

Greg Baker | AFP | Getty Images

According to the China Iron and Steel Association, the national daily output of intermediate steel products such as crude steel and pig iron as well as finished products increased during the month of May by about 1% to 3%. On the other hand, demand, although still active, had fallen.

China’s consumption of crude steel, for example, fell 14% in May from a year ago, said Niki Wang, head of iron ore at S&P Global Commodity Insights, citing internal analysis.

“The year-on-year decline in steel demand has been much larger than that in crude steel production. In this case, steel mills are indeed in trouble (with price pressure steel),” she said.

This period coincided with China’s largest city-wide pandemic lockdown in Shanghai.

As a result, inventory levels are 12% higher than a year ago and could take almost two months to drop to five-year median levels, assuming steel demand comes back to life, a said Richard Lu, steel research analyst at CRU Group.

The Chinese market is also competing with a proliferation of cheaper Russian semi-finished steel billets, said Paul Lim, principal analyst for ferrous commodities and steel in Asia at Fastmarkets Asia.

There had been signs of life for domestic steel consumption after China emerged from lockdowns in early June, but ‘stop-start’ disruptions caused by a relapse into scattered lockdowns [have] been an unwelcome blow to the country’s well-intended economic recovery.

Atilla Widnell

Managing Director at Navigate Commodities

As epidemics gripped the country, the country’s biggest steel consumers as well as growth engines of the Chinese economy such as building construction and infrastructure development went silent, Navigate’s chief executive said. Commodities, Atilla Widnell.

That’s because “there’s simply no one to work at the sites,” he added, pointing out that the industry has been surprised by the return of shutdowns.

After a long-awaited opening of Shanghai in early June after new cases were recorded in Beijing and Shanghai, China has started to reimpose some restrictions.

Last week, new data from China’s National Bureau of Statistics showed real estate investment for the first five months of the year was down 4% from a year earlier, up from the decline 2.7% between January and April.

Volume home sales fell 34.5% year-on-year in the first five months of 2022.

“There had been signs of life for domestic steel consumption after China emerged from lockdowns in early June, but the ‘stop-start’ disruptions caused by a relapse into scattered lockdowns [have] been an unwelcome blow to the nation’s well-intended economic recovery,” Widnell said.

I can’t just stop the blast furnaces

Even as steel prices fell and eroded steelmaking profitability, mill owners continued production, with many using lower-grade iron ore to produce smaller volumes.

China’s blast furnaces are now operating near capacity, at more than 90% – the highest rate in 13 months – despite thinner profits, analysts said.

Lu said some factories suffered “largely negative margins” in April and May.

Price data shows prices for popular steel products such as rebar and hot-rolled coil used for home construction have fallen nearly 30% after peaking around May last year at following an industrial recovery to revive the economy.

Shutting down blast furnaces can be inefficient, as the large reactors used to turn iron ore into liquid steel must operate continuously.

Once they are closed, it takes a long time – up to six months – to restart operations.

“So Chinese operators are keeping their blast furnaces ‘hot’ using lower-grade ores to voluntarily reduce yields in the hopes they can ramp up quickly and meet the recovery in steel demand as they go. as temporary lockdowns are lifted,” Widnell said.

“We believe these operators are also producing larger quantities of semi-finished steel products so as not to crush finished steel prices with inflated inventories.”

Wood Mackenzie’s Wu said another reason growers are stubborn is so they can hit their allowed annual production targets before Beijing cuts them next year as part of an effort to meet its targets. emissions targets by 2030 and 2060.

“Each year’s production is defined by last year’s production. It is therefore in the interest of producers to produce the maximum amount of steel each year, as reductions will be applied to that year’s production. “Wu said.

Return of the crisis?

The demand and prices for steel fell between 2012 and 2016 after the sharp slowdown in the Chinese economy, leading to a drop in raw material prices.

For many miners serving China, like those in Australia, it was the end of the so-called mining boom.

In 2015 alone, China’s major steel companies suffered losses of more than 50 billion yuan.

For starters, this downturn is not like 2015, Wu said, and steel producers have learned to weather the volatility.

“So they will continue to produce steel because they have to pay salaries and maintain other cash flow. Many producers can probably last two years without making any money. Lots of people outside [of China] don’t understand that resilience,” he said.

CRU’s Lu said while some factories are considering slowing production, inventory levels are “very far from panic levels” and storage capacity is not yet a serious issue.

There are, however, early signs that the industry is beginning to adapt to these adverse conditions.

Recently, there were rumors that the Jiangsu provincial government had instructed local steel mills to cut production by around 3.32 million tons for the rest of the year.

It is not clear whether this is an effort to reduce excessive steel inventories or a broader embrace of production and emissions reductions.

“I think China is fully aware of the weak domestic demand for steel this year and will use executive power to force factories to cut production as it has done before,” said analyst Alex Reynolds. commodity and energy pricing agency Argus Media.

“If steel prices continue to fall sharply with losses spreading, the Chinese government could set exact numbers for production cuts – much like what OPEC did when Covid was at its peak. in 2020-2021.”

S&P’s Wang agreed, adding that Beijing’s revival of looser monetary policies should also play a role in boosting demand for steel.

Meanwhile, other players in the steelmaking supply chain, such as Australian and Brazilian iron ore miners, need not worry for now, as lower production from mines made up for the drop in demand, she said.

But miners are nonetheless concerned about bearish conditions in China, Wang added.

“High pig iron production means demand for iron ore is strong. Iron ore stocks in major Chinese ports have been trending down since the Chinese Lunar New Year holiday,” she said.

Iron ore prices have hovered between $130 and $150 a ton over the past two months, down from prices as low as $30 to $40 a ton during the 2012-2016 crisis.