China’s steel mill owners in bad mood as demand hits

Beijing commodities advisor Simon Wu said steel mill owners in parts of China are in a bad mood.

Steel stocks are slowly building up in warehouses of the country’s largest steelmaking hub, the northeastern city of Tangshan, as well as in Jiangsu and Shandong provinces, said Millers Luo, a senior advisor to analyst Wood Mackenzie.

They said steel demand is falling amid pandemic lockdowns and disrupted construction activity.

“There is negative energy everywhere. The steel industry is not making any profit,” Wu said.

There is a lot of steel – a key raw material in manufacturing powerhouse – sitting idle across the country in the midst of a stop-and-go economy driving down demand and prices.

Prices of both steel and its major components of iron ore were volatile during the Shanghai shutdown but headed for a downward trajectory earlier this month.

Weak demand for steel, a driver of China’s economy, also reflected the broader slowdown in the country, although recent data suggested some improvement as industrial production rose slightly by 0.7% in May from a year ago.

Crucially, China’s steel industry – the largest in the world – hosts vast 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 this, any tension within China could expose a vast network of supply chains, which could add to the pressures of the current global turmoil.

A worker cuts steel pipes near a coal-fired power plant in Zhangjiakou, China, on November 12, 2021. The country’s largest steel consumers and drivers of economic growth — such as property construction and infrastructure development — have been quiet, according to one analyst.

Greg Baker | AFP | Getty Images

According to the China Iron and Steel Association, the national daily production of intermediate steel products such as crude steel and iron ore as well as finished goods rose during May by 1% to 3%. On the other hand, demand decreased, while it was still active.

China’s consumption of crude steel, for example, fell 14% in May compared to last year, said Nikki Wang, head of iron ore for S&P Global Commodity Insights, citing internal analysis.

“The year-on-year decline in steel demand was much greater than the crude steel production. In this case, steel mills are already struggling (with pressure on steel prices),” she said.

That period coincided with the largest citywide epidemic lockdown in China so far in Shanghai.

Thus, inventory levels are 12% higher than last year and could take nearly two months to fall to the average levels of the past five years, assuming steel demand has come back to life, said Richard Low, steel research analyst at CRU Group.

The Chinese market is also competing with the proliferation of cheaper Russian semi-finished steel bars, said Paul Lim, principal Asia analyst for iron and steel raw materials at Fastmarkets Asia.

There were signs of life for domestic steel consumption after China exited lockdowns in early June, but the ‘shutdown’ disruptions caused by a relapse into sporadic shutdowns [have] It was an unwelcome blow to the country’s bona fide economic recovery.

Attila Wednell

Managing Director of Navigate Commodities

With the outbreak in the country, Attila Wednell, managing director of Navigate Commodities, said that calm was the country’s largest steel consumer as well as growth drivers of the Chinese economy such as real estate construction and infrastructure development.

That’s because “there is simply no one to work on the sites,” he added, noting that the industry was surprised by the return of lockdowns.

After the much-anticipated opening of Shanghai in early June after new cases were recorded in both Beijing and Shanghai, China has begun to reimpose 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, up from 2.7% between January and April.

Home sales by volume declined 34.5% year-over-year in the first five months of 2022.

There were indications of a life for domestic steel consumption after China emerged from lockdowns in early June, but the ‘stop-start’ disruptions caused by a relapse into sporadic lockdowns [have] It was an unwelcome blow to the country’s bona fide economic recovery.”

Melting furnaces can not only be closed

Despite falling steel prices and eroding the profitability of the steel industry, steel mill owners continued to produce, with many of the lower quality iron ore being used to produce smaller volumes.

Analysts said China’s blast furnaces are now operating near full capacity, at more than 90% – the highest rate in 13 months – despite falling profits.

Lu said some factories experienced “largely negative margins” during April and May.

Pricing data shows that prices for popular steel products such as rebar and hot rolled coils used in home construction have fallen by nearly 30% after peaking in May last year after the industrial recovery to stimulate the economy.

Shutting down blast furnaces can be ineffective, as the large reactors used to convert iron ore to liquid solid need to run constantly.

Once closed, it takes a long time – up to six months – to restart processes.

“Therefore, Chinese operators are keeping their blast furnaces ‘hot’ by using lower grade ores to voluntarily reduce yields in the hope that they can quickly ramp up production and respond to restore steel demand when the temporary shutdown is lifted,” Weidnell said.

“We believe that these operators are also producing more semi-finished steel products so as not to crush finished iron prices with bloated stocks.”

Wood Mackenzie’s Wu said another reason for producers is that they can meet allowable annual production targets before Beijing cuts them next year as part of an effort to meet its emissions targets by 2030 and 2060.

“Each year’s production is determined by last year’s production. So it is in the interest of producers to produce the maximum amount of steel each year as the cuts will be applied to that year’s production,” Wu said.

Back slack?

Steel demand and prices fell between 2012 and 2016 after the Chinese economy slowed sharply, causing commodity prices to plummet.

For many miners serving China, such as those in Australia, this was the end of the so-called mining boom.

In 2015 alone, China’s major steel companies incurred losses of over 50 billion yuan.

For starters, this downturn isn’t 2015, Wu said, and steel producers have learned to be resilient against volatility.

“So, they will continue to produce steel because they have to pay wages and keep other cash flows. Perhaps many producers can go on for two years without making money. Many people are abroad. [of China] I don’t understand this flexibility.”

CRU’s Lu said that while some factories are considering slowing production, 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 starting to adapt to these adverse conditions.

newly, There were rumors that the Jiangsu provincial government had tasked local steel mills with cutting production by about 3.32 million tons for the rest of the year.

It is not clear whether this is an attempt to reduce excessive steel stocks or part of a broader commitment to cut production and emissions.

“I think China is very aware of the weak domestic demand for steel this year, and will use executive force to force factories to cut production just as they did before,” said Alex Reynolds, analyst at commodity and energy prices agency Argus Media.

“If steel prices continue to fall sharply as losses continue, the Chinese government may set accurate numbers for production cuts – like what OPEC did when Covid was at its peak in 2020-2021.”

S&P’s Wang agreed, adding that stimulus from looser monetary policies in Beijing should also play a role in getting steel demand back on track.

Meanwhile, others in the steel industry’s supply chain, such as Australian and Brazilian iron ore miners, do not need to worry for now as lower production from mines offset lower demand, she said.

Wang added that miners are nonetheless concerned about declining conditions in China.

“Rising cast iron production means iron ore demand is strong. Iron ore stocks at major ports in China have been trending downward since the Chinese Lunar New Year holiday,” she said.

Iron ore prices have hovered between $130 and $150 per ton in the past two months, compared to low prices of $30-40 per ton during the 2012-2016 recession.

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