High production weighs on Chinese steel market; market eyeing steel output cuts

China’s crude steel production remained high in July and is likely to inch higher in August, weighing on the steel market amid lackluster steel demand. However, some market sources say they believe China will gradually carry out steel production cuts over the next few months for annual steel output controls, thus limiting further room for downside movement in steel prices.

High production

China’s crude steel output in July was 11.5% higher year on year at 90.8 million mt, although daily output retreated 3.6% from June to 2.929 million mt, National Bureau of Statistics data showed Aug. 15.

China’s pig iron output in July rose 10.2% year on year to 77.6 million mt, while daily output fell 2.4% month on month to 2.503 million mt.

Over January-July, China’s crude steel and pig iron output increased by 2.5% and 3.5% year on year, respectively, to 626.51 million mt and 528.92 million mt.

Moreover, after steel output controls to reduce air pollution at Tangshan city, China’s biggest steelmaking hub, were lifted at the start of August, China’s pig iron and steel production this month is likely to increase again from July levels, some market sources said.

China Iron & Steel Association on Aug. 14 estimated China’s daily crude steel and pig iron output for Aug. 1-10 at 2.953 million mt and 2.533 million mt, respectively, up 0.8% and 1.1% from July’s average, and 9.1% and 10% higher year on year.

Finished steel inventories at mills and spot markets monitored by the China Steel Industry Association reached 25.69 million mt as of Aug. 10, up 7.5% from the end of July, but still 6% lower year on year.

In tandem with rebounding steel output and rising inventories, Chinese domestic rebar prices fell by Yuan 165/mt ($22.6/mt) from Aug. 1 to Yuan 3,691/mt on Aug. 14, S&P Global Commodity Insights data showed.

Steel output cuts

It remains unclear when Chinese mills will implement output cuts in order to keep the country’s annual crude steel within 2022 levels, which is partly the reason behind currently weak market.

But some mill sources in northern and eastern China told S&P Global that some major mills in these two regions have been or will be ordered verbally to cut their production later this year.

According to market sources, as of mid-August, China’s biggest steelmaker Baowu Group, as well as some major mills in Shandong province, have received verbal orders to keep their 2023 crude steel output within 2022 levels.

Meanwhile, market chatter suggested that Hebei and Jiangsu provinces, China’s leading and second-largest steelmaking hubs, respectively, will soon verbally inform major local mills to cut output.

Some sources said mills will only receive verbal orders to cut output directly from the local government, instead of formal announcements, and therefore it is difficult to foresee how much crude steel output in China will be reduced in the next few months.

“I think China’s steel production will slow down over September-December, which will almost certainly support the steel market by then …but sluggish steel demand may limit the upside room for steel prices,” one mill source said.

Bleak steel demand

The floor space of China’s new home construction starts, the most crucial steel demand driver, in July fell 30.2% month on month and 26.5% year on year, according to NBS data.

Over the first seven months of 2023, new home starts fell 24.5% year on year, and 52.1% from the same period of 2021.

The floor space of new home sales, a major channel to fund new projects, in July fell 46.1% month on month and 23.9% year on year. New home sales over January-July were down 6.5% year on year and 34.5% lower than in the same period of 2021.

As property sales still show no signs of bottoming out, some steel market sources predicted that new home starts and property-related steel demand would continue to decline in the foreseeable future.

China’s infrastructure investment in Jujly increased by 4.6% year on year, slowing from a 6.4% year-on-year increase in June. Infrastructure investment over January-July rose 6.8% year on year.

Some market sources said they expect China to step up policy support to the infrastructure sector for the remainder of 2023, but this is still unlikely to fully offset the falling steel demand in property-related sectors.

Author Jing Zhang, Market Specialist – Metals