Expected demand recovery likely to ease China’s steel oversupply

China’s oversupplied steel market could soon see some relief as the downtrend in demand is expected to bottom out in the near term, industry sources told S&P Global Commodity Insights May 16.

China’s daily pig iron output hit a record high in April at a time when the market faced tepid demand, keeping steel markets under pressure.

While oversupply in China’s steel market is unlikely to ease at least this month, some industry sources were becoming optimistic about the demand outlook, expecting the downfall to bottom out in the near term.

Improved demand outlook is expected to mostly stem from China’s latest move of reducing property loan interest rates by 0.2 points for first-home buyers May 15, indicating that the country has shifted from deleveraging to supporting the property sector.

Although this move will not reverse the downward trend in property sales or new home starts in the near term, it signals more supportive policies to be introduced to prevent uncontrolled default by cash-strapped developers, which will ease any further squeeze on steel demand.

More importantly, measures to tackle the COVID-19 situation would soon start showing results, leading to smoother logistics movement within the country, sources said.

The pandemic-induced social restrictions and lockdowns in China were the major reasons behind the slump in April’s economic data, and were also hampering stimulus measures in infrastructure, property and manufacturing sectors.

Some market sources believed as soon as logistics and travel can return to normal, China’s fiscal and monetary policy will help begin to accelerate infrastructure investment and manufacturing production.

China’s retail goods consumption will also improve in tandem, which, in turn, would also assist recovery of manufacturing steel demand, sources said.

Robust steel output

China’s pig iron output in April reached 76.78 million mt, averaging 2.55 million mt/day, up 10.80% on the month, National Bureau of Statistics data showed May 16.

April’s figure was unchanged on a yearly basis, as NBS revised the pig iron output in April 2021 from 75.97 million mt to 76.78 million mt.

China’s crude steel production in April was still 5.20% lower on year at 92.78 million mt, but the daily output rose 8.60% on the month to 3.09 million mt, breaching the 3 million mt level for the first time since July 2021.

China’s pig iron and crude steel output in the first four months totaled 280.30 million mt and 336.15 million mt, still 9.40% and 10.30% lower on the year, respectively, according to the NBS data.

Some market sources expected China’s pig iron and crude steel output in May to be at similar levels of April.

China’s electric arc furnace, or EAC, steelmakers were seen reducing their steel production owing to loss-making market conditions. However, output cuts were barely reported at integrated steelmakers that use a blast furnace and a converter route, as they were still posting thin profits or only marginal losses, according to sources.

As the suspension and restarting of blast furnaces is costly, marginal losses do not push steelmakers to cut pig iron and crude steel production.

Languishing steel demand

China’s COVID-19 resurgence in April exacerbated a slowdown in the property sector, leading to adverse effects on overall steel demand greater than on steel production.

China’s property sales value, now a major channel for funding property construction, fell 38.80% on the year in April, declining further from a 17.70% year-on-year drop in March, according to the latest NBS data.

The year-on-year decline in housing starts also worsened to 44.20% on the year in April from a 22.20% decline seen in March.

China’s infrastructure investment rose 3% on the year in April, but the rate largely slowed from the 8.80% year-on-year growth in March.

Major steel consumers in the manufacturing sector also saw a year-on-year decline in April, with vehicle production down 43.50% on the year.

However, May 16, Shanghai released its timetable for lifting lockdowns that began in late March, indicating that the city and the entire country may gradually return to normalcy soon, which would unlikely affect construction and manufacturing activities further, market sources said.

— Staff