Steel mill
owners in parts of China are in a bad mood, Beijing-based commodities
consultant Simon Wu said.
Steel
inventories are slowly piling up in the warehouses of the country’s biggest
steelmaking hub, the northeastern city of Tangshan, as well as in the provinces
of Jiangsu and Shandong, mill owners told Wu, a senior consultant at Wood
Mackenzie.
Demand for
steel is falling amid pandemic lockdowns and crippled construction activity,
they said.
“There’s
negative energy all round. The steel industry is just not making any profit,”
Wu said.
A lot of steel — a key raw material in the manufacturing powerhouse — is
sitting idle around the country amid a stop-and-start economy which is forcing
down demand and prices.
Prices of
both steel and its main ingredient iron ore were volatile during the Shanghai
lockdown but headed on a downward trajectory earlier this month.
Weak demand
for steel, a bellwether of China’s economy, also reflected the country’s
broader slowdown, though recent data pointed to some improvement as industrial
production rose slightly by 0.7% in May from a year ago.
Crucially,
China’s steelmaking industry — the biggest in the world — hosts extensive
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.
Because of
that, any jitters within China can unravel an extensive network of supply
chains, potentially heaping further pressures on existing global disruptions.
According to
the China Iron and Steel Association, national daily outputs of intermediary
steel products such as crude steel and pig iron as well as finished goods had
been rising over the month of May by between about 1% and 3%. In contrast,
demand, while still active, had fallen.
China’s
consumption of crude steel, for instance, fell 14% in May compared with last
year, S&P Global Commodity Insights iron ore lead Niki Wang said, citing
in-house analyses.
“The
year-on-year decline in steel demand was much greater than that of crude steel
production. In that case, steel mills are indeed struggling (with the pressure
on steel prices),” she said.
That period
coincided with China’s biggest citywide pandemic lockdown yet in Shanghai.
Consequently,
inventory levels are 12% higher compared with last year and may take nearly two
months to fall to the median levels of the past five years, assuming steel
demand roars back to life, 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, lead analyst of Asia ferrous raw materials and
steel at Fastmarkets Asia.
As outbreaks
gripped the nation, the country’s biggest consumers of steels as well as the
Chinese economy’s growth engines such as property construction and
infrastructure development have gone quiet, said Navigate Commodities managing
director Atilla Widnell.
That’s
because “there is simply no one to work at the sites,” he added, pointing out
the industry was taken aback by the return of lockdowns.
After a
much-awaited opening of Shanghai in early June after new cases were recorded
for both Beijing and Shanghai, China started re-imposing some restrictions.
Last week,
new data from China’s National Bureau of Statistics showed property investment
for the first five months of the year declined 4% from a year earlier,
increasing from the 2.7% drop between January and April.
Home sales
by volume fell 34.5% on year in the first five months of 2022.
“There had
been signs of life for domestic steel consumption after China’s exit from
lockdowns in early June, but the ‘stop-start’ disruptions caused by a relapse
into scattered lockdowns [have] been an unwelcome blow to the country’s
well-intended economic recovery,” Widnell said.
Can’t just shut down blast furnaces
Even though steel prices have fallen and eroded steelmaking profitability,
steel mill owners have continued production, with many using iron ore of lower
quality to produce smaller volumes.
Chinese
blast furnaces are now operating close to full capacity, at more than 90% — the
highest rate in 13 months — despite thinner profits, analysts said.
Lu said some
mills suffered “largely negative margins” over April and May.
Pricing data
shows prices of popular steel products such as rebar and hot-rolled coil used
for building homes have fallen by up to nearly 30% after peaking around May
last year following an industrial revival to kickstart the economy.
Shutting
down blast furnaces can be inefficient, as large reactors used for turning iron
ore into liquid steel need to run continuously.
Once they’re shut down, it takes a long time — up to six months — to restart
operations.
“So, Chinese operators are keeping their blast furnaces ‘hot’ by utilizing lower
grade ores to voluntarily reduce yields in the hope that they can ramp up
swiftly and respond to recovering steel demand as and when temporary lockdowns
are lifted,” Widnell said.
“We believe
that 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 producers soldier on is so they can hit
their annual allowed output targets before Beijing reduces them next year as part
of an effort to meet its emissions targets by 2030 and 2060.
“Each year’s
production is defined by last year’s output. So it is to producers’ advantage
to produce the maximum amount of steel each year as cuts will be applied to
that year’s output,” Wu said.
Return of the slump?
Steel demand and prices slumped between 2012 and 2016 after the Chinese economy
slowed heavily, causing commodity prices to fall.
For many
miners servicing China, such as those in Australia, it was the end of the
so-called mining boom.
In 2015
alone, China’s major steel firms suffered losses of more than 50 billion yuan.
For
starters, this downturn is not 2015, Wu said, and steel producers have learned
to be resilient against volatility.
“So, they
will keep producing steel because they have to pay wages and maintain other
cash flows. Many producers can probably last two years without making money.
Many people on the outside [of China] don’t understand this resilience,” he
said.
CRU’s Lu
said while some mills are contemplating slowing production, inventory levels
are “far far away from the panic levels” and storage capacity is not yet a
serious issue.
There are,
however, early signs that the industry is starting to adjust to these adverse
conditions.
Recently,
there were rumors that the Jiangsu provincial government had mandated local
steel mills to cut production by about 3.32 million tonnes for the rest of the
year.
It’s not
clear if that is an effort to curb excessive steel inventory or part of wider
adherence to cutting production and emissions.
“I think
China is fully aware of the weaker domestic steel demand this year, and will
use executive power to force mills to cut production just like it did before,”
said Alex Reynolds, an analyst at commodity and energy price agency Argus Media.
“If steel
prices continue to fall sharply with losses extending, the Chinese government
may set exact numbers for production cuts – kind of like what the OPEC did when
Covid was at its height in 2020-2021.”
S&P’s
Wang agreed, adding that stimulus from Beijing’s looser monetary policies
should also play a part in reviving steel demand down the track.
Meanwhile,
others in the steelmaking supply chain, such as Australian and Brazilian iron
ore miners, need not worry for now as lower output from the mines have offset
lower demand, she said.
But miners
are nonetheless concerned about bearish conditions in China, Wang added.
“The high
pig iron production means demand for iron ore is solid. The iron ore inventory
at China’s major ports has been trending down since the Chinese Lunar New Year
holidays,” she said.
Iron ore
prices have hovered between $130 and $150 a tonne in the past two months,
compared with prices of low as $30 to $40 a tonne during the 2012-2016 slump.
Source: CNBC