Steel's Slump: China's Margins Melt as Production Surges and Demand Lags

China: In the early days of April, China's Steel industry faced increased pressure on prices and margins due to the continued high production and slow demand recovery following the recent surge in COVID-19 cases from December 2022 to February. Despite rising output in the first quarter, market participants predict a mild slowdown in late April due to poor margins, leading to support prices.

Despite the robust credit expansion and a slight improvement in March's home sales, China's steel demand is expected to remain weak and uneven for the rest of 2023. The daily pig iron and crude Steel output stood at 2.476 million mt and 2.988 million mt, respectively, from April 1-10, representing a 1.02% and 1.25% increase from the previous period of March 21-31.

According to a report by the National Bureau of Statistics, China's crude Steel production saw a 5.6% increase, equivalent to almost 9 million mt, in January-February 2022 as compared to the same period last year. It is expected that the year-on-year growth rates of pig iron and crude Steel output in March and April will remain consistent with the levels seen in January-February. Although the finished Steel inventories at Steel mills monitored by the CISA increased by 6.2% from March 31 to April 10, reaching 18.32 million mt, they were still 0.9% lower compared to the previous year.

According to recent reports, the profit margins for domestic rebar and hot rolled coil in China have experienced a significant decline in the first 13 days of April. Currently, these margins average negative $19/mt and negative $22/mt, as compared to $65/mt and $60/mt from the previous year. This has primarily been attributed to high Steel output, causing most mills to experience mounting pressure due to low demand, poor margins, and high inventory.

Furthermore, despite a slight increase in home sales in some major cities within March, China's new construction projects, which are a significant driving force behind Steel demand, have yet to fully recover. Many mills, especially those whose end-users are primarily property and related sectors, are struggling to stay afloat in the current climate.

China experienced a surge in mid-to-long term Yuan loans to households, primarily for the purpose of purchasing homes, reaching a record high of Yuan 634.8 billion ($92.67 billion) in March. The growth in household credit coincides with a rebound in home sales, with a 44% increase in floor space sold recorded in 30 major cities, compared to the same period last year.

It is worth noting, however, that this remains approximately 4% lower than figures from 2019. The rise in demand for homes is attributed to a delayed need caused by the COVID-19 pandemic waves in late 2022 and early 2023, making it difficult to determine whether the progress can be sustained.

The property market in tier one and select tier two cities is expected to gradually recover through 2023. However, most smaller cities are likely to continue facing challenges due to excess housing inventory and the significant debts of developers.

For developers, 2023 will be focused on reducing debts and ensuring timely pre-sales. Unfortunately, it is unlikely that new home construction will see a significant recovery until after 2023. Reports also show a surge in mid-to-long term new loans to corporates in March. In fact, such new loans rose by 54% YoY, reaching a total of Yuan 2.07 trillion.

The surge in corporate loans in China can be attributed to the significant support from big state-owned enterprises and local government special bonds. This development is expected to sustain China's infrastructure investment and demand for Steel in the foreseeable future. While the growth in infrastructure Steel demand is predicted to remain robust, it may not completely counterbalance the deceleration in the property sector. This is because the consumption in property and related industries is roughly double that of infrastructure.

It is worth noting that the property sector serves as a key contributor to China's household consumption, which in turn affects the country's Steel demand both directly and indirectly. Given this symbiotic relationship, the lacklustre state of the property market suggests a sluggish recovery in Steel demand for the current year.

Despite China's plan to cap its crude Steel production by 2023, market analysts predict that any Steel output reduction mandated by the government this year will be modest, resulting in limited assistance to Steel prices.