Steel plant owners in some parts of China are in a bad mood, said Simon Wu, a Beijing-based raw materials consultant.
Steel inventories are slowly building up in warehouses in the country’s largest steel hub, the northeastern city of Tangshan, as well as in Jiangsu and Shandong provinces, mill owners told Wu, a senior consultant at analyst Wood Mackenzie. .
Steel demand is falling amid the pandemic lockdowns and paralyzed construction activity, they said.
“There is negative energy everywhere. The steel industry is just not making a profit,” Wu said.
A vast amount of steel, a key raw material in manufacturing powerhouses, is sitting idle across the country amid an intermittent economy that is forcing demand and prices down.
Prices for both steel and its main ingredient, iron ore, were volatile during the Shanghai lockdown, but headed for a downward trajectory earlier this month.
Weak demand for steel, a proxy for China’s economy, also reflected the country’s overall slowdown, although recent data points to some improvement, as industrial production rose slightly by 0.7% in May from a year earlier. .
Crucially, China’s steel industry, the world’s largest — hosts extensive supply chains stretching from Chinese blast furnaces to overseas iron ore mines in Australia and Brazil, the largest suppliers of iron ore to China.
Because of that, any jitters inside China can throw a sprawling network of supply chains out of whack, which could further increase pressures on existing global disruptions.
A worker cutting steel pipes near a coal-fired power plant in Zhangjiakou, China, on November 12, 2021. The country’s largest consumers of steel and its engines of economic growth, such as property construction and infrastructure development, they have gone quiet, according to one analyst.
Greg Baker | AFP | fake images
According to the China Iron and Steel Association, daily domestic output of intermediate steel products such as crude steel and pig iron, as well as finished products, increased by 1-3% during the month of May. On the contrary, the demand, although still active, had fallen.
China’s crude steel consumption, for example, fell 14% in May compared to a year ago, S&P Global Commodity Insights iron ore leader Niki Wang said, citing internal analysis.
“The year-on-year drop in steel demand was much larger than that in crude steel production. In that case, mills are struggling (with pressure on steel prices),” he said.
That period coincided with the largest city-wide pandemic lockdown in China so far in Shanghai.
As a result, inventory levels are 12% higher compared to last year and may take nearly two months to drop to five-year average levels, assuming steel demand comes back to life, Richard said. Lu, a 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 Asia steel and ferrous commodities at Fastmarkets Asia.
As the outbreaks gripped the nation, the country’s biggest consumers of steel, as well as growth engines of the Chinese economy such as property construction and infrastructure development, fell silent, the managing director said. of Navigate Commodities, Atilla Widnell.
That’s because “there’s just no one to work on the sites,” he added, noting that the industry was surprised by the return of lockdowns.
Following a much-anticipated opening of Shanghai in early June after new cases were reported in both Beijing and Shanghai, China has begun to re-impose some restrictions.
Last week, new data from China’s National Bureau of Statistics showed that real estate investment for the first five months of the year fell 4% from a year earlier, rising from a 2.7% drop between January and April.
Home sales by volume fell 34.5% year-on-year in the first five months of 2022.
“There were 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] has been an unwelcome blow to the country’s well-intentioned economic recovery,” Widnell said.
Even as steel prices have fallen and eroded the profitability of steelmaking, mill owners have continued production, with many using lower-grade iron ore to produce smaller volumes.
Chinese blast furnaces are now operating near full capacity, at more than 90%, the highest rate in 13 months, despite lower profits, analysts said.
Lu said some mills suffered “largely negative margins” during April and May.
Price data shows that prices for popular steel products such as rebar and hot-rolled coil used for home construction have fallen by as much as 30% after peaking around May this year. past after an industrial reactivation to reactivate the economy.
Shutting down blast furnaces can be inefficient, as the large reactors used to turn iron ore into liquid steel must run 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’ by using lower-grade ores to voluntarily reduce yields in the hope they can ramp up quickly and respond to the recovery in steel demand when temporary lockdowns are lifted,” he said. Widnell.
“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 keep working is so they can meet their annual allowable production targets. before Beijing cuts them next year as part of an effort to meet its emissions targets for 2030 and 2060.
“Each year’s output is defined by last year’s output. So it is to the advantage of producers to produce the maximum amount of steel each year, as cuts will be applied to that year’s output,” Wu said.
Steel demand and prices plummeted between 2012 and 2016 after the Chinese economy slowed sharply, causing raw material prices to fall.
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.
This recession is not from 2015 to begin with, Wu said, and steelmakers have learned to resist volatility.
“So they will continue to produce steel because they have to pay wages and maintain other cash flows. A lot of producers can probably last two years without making any money. A lot of people abroad [of China] I don’t understand this resilience,” he said.
CRU’s Lu said while some mills are contemplating cutting output, inventory levels are “a long way from panic levels” and storage capacity is not yet a serious problem.
However, there are early signs that the industry is beginning to adapt to these adverse conditions.
Recently, there were rumors that the Jiangsu provincial government had ordered local mills to cut output by around 3.32mt for the rest of the year.
It is unclear whether this is an effort to curb excess steel inventory or part of a broader commitment to cutting output and emissions.
“I think China is fully aware of the lower domestic demand for steel this year and will use executive power to force mills to cut output like they did before,” said Alex Reynolds, an analyst at the commodity prices agency and Argus Medium energy.
“If steel prices continue to fall sharply and losses spread, the Chinese government can set exact numbers for production cuts, kind of like what OPEC did when Covid was at its peak in 2020-2021.”
S&P’s Wang agreed, adding that stimulus from Beijing’s looser monetary policies should also play a role in reviving steel demand going forward.
Meanwhile, others in the steelmaking supply chain, such as Australian and Brazilian iron ore miners, need not worry for now as lower output from mines has offset lower demand, it said.
However, miners are concerned about bearish conditions in China, Wang added.
“High pig iron production means iron ore demand is strong. Iron ore inventory in China’s major ports has been on a downward trend since the Chinese Lunar New Year holidays,” it said.
Iron ore prices have hovered between $130 and $150 a ton over the past two months, compared to prices as low as $30 to $40 per ton during the 2012-2016 slump.