China’s steel mill owners are in a bad mood as demand hurts

Steel mill owners in parts of China are in a bad mood, said Beijing-based commodities consultant Simon Wu.

Steel inventories are slowly building up in warehouses in the country’s biggest steel hub, the northeast city of Tangshan, as well as in Jiangsu and Shandong provinces, mill owners told Wu, a senior consultant at Wood Mackenzie.

Steel demand is falling amid pandemic lockdowns and stalled construction activity, they said.

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

Too much steel – a key raw material in the manufacturing powerhouse – is stalled across the country amid a stop-and-go economy that is forcing demand and prices down.

Prices for steel and its main ingredient iron ore were volatile during the Shanghai lockdown, but followed a downward trajectory earlier this month.

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

Fundamentally, China’s steel industry – the largest in the world – is home to extensive supply chains that stretch from Chinese blast furnaces to overseas iron ore mines in Australia and Brazil, the biggest suppliers of iron ore to China. .

Because of this, any jitters in China could unravel an extensive network of supply chains, potentially further increasing pressures on existing global disruptions.

A worker cutting steel pipes near a coal-fired power plant in Zhangjiakou, China, November 12, 2021. The country’s biggest consumers of steel and its engines of economic growth – such as property construction and infrastructure development – have gone quiet, according to one analyst.

Greg Baker | AFP | Getty Images

According to the China Iron and Steel Association, national daily production of intermediate steel products such as crude steel and pig iron, as well as finished products, increased during the month of May by between about 1% and 3%. In contrast, demand, still active, had fallen.

China’s crude steel consumption, for example, dropped 14% in May compared to last year, said Niki Wang, iron ore leader at S&P Global Commodity Insights, citing internal analysis.

“The year-on-year drop in steel demand was much greater than the drop in crude steel production. In this case, steelmakers are really struggling (with pressure on steel prices),” she says.

This period coincided with China’s largest city-wide pandemic lockdown in Shanghai.

As a result, inventory levels are 12% higher compared to last year and could take almost two months to drop to five-year average levels, assuming steel demand comes back to life, said Richard Lu, an analyst at CRU Group steel research.

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

There were signs of life for domestic steel consumption following China’s exit from lockdowns in early June, but ‘stop-start’ disruptions caused by a relapse into scattered lockdowns [have] it was an unwelcome blow to the country’s well-meaning economic recovery.

Atilla Widnell

managing director at Navigate Commodities

As outbreaks gripped the country, the country’s biggest steel consumers, as well as the growth engines of the Chinese economy, such as real estate construction and infrastructure development, have gone quiet, said Navigate Commodities managing director 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.

After the long-awaited opening of Shanghai in early June, after new cases were reported in Beijing and Shanghai, China has started to impose some restrictions again.

Last week, new data from China’s National Bureau of Statistics showed real estate investment in the first five months of the year fell 4% from a year earlier, up from a 2.7% drop between January and April.

Home sales by volume are down 34.5% year-on-year in the first five months of 2022.

“There were signs of life for domestic steel consumption following China’s exit from lockdowns in early June, but ‘stop-start’ disruptions caused by a relapse into scattered lockdowns [have] it was an unwelcome blow to the country’s well-meaning economic recovery,” said Widnell.

Can’t just shut down blast furnaces

Although steel prices fell and eroded the steel mill’s profitability, steel mill owners continued production, with many using lower grade iron ore to produce smaller volumes.

Chinese blast furnaces are operating close to full capacity, at more than 90% – the highest rate in 13 months – despite lower profits, analysts said.

Lu said some mills experienced “largely negative margins” in April and May.

Price data shows that prices for popular steel products such as rebar and hot-rolled coil used in home construction have dropped nearly 30% after peaking in May last year following an industrial renaissance to boost demand. economy.

Shutting down blast furnaces can be inefficient, as large reactors used to turn iron ore into liquid steel need to run continuously.

Once shut down, it takes a long time — up to six months — to restart operations.

“Thus, Chinese operators are keeping their blast furnaces ‘hot’, using low-grade ores to voluntarily reduce yields, in the hope that they can quickly increase and respond to the recovery in steel demand as temporary lockdowns are lifted. “, 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 producers continue to struggle 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 by 2030 and 2060

“Each year’s output is defined by last year’s output. Therefore, it is advantageous for producers to produce the maximum amount of steel each year as the cuts will be applied to that year’s output,” Wu said.

Return from the fall?

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, it was the end of the so-called mining boom.

In 2015 alone, China’s major steelmakers suffered losses of more than 50 billion yuan.

For starters, this slowdown isn’t 2015, Wu said, and steelmakers have learned to be resilient to volatility.

“So they’re going to keep producing steel because they have to pay salaries and maintain other cash flows. A lot of producers can probably last two years without making money. A lot of outsiders [of China] I don’t understand that resilience,” he said.

CRU’s Lu said that while some mills are contemplating slowing production, inventory levels are “far away from panic levels” and storage capacity is not yet a serious issue.

There are, however, early signs that the industry is starting to adjust to these adverse conditions.

Recently, there were rumors that the Jiangsu provincial government had ordered local steelmakers to reduce production by about 3.32 million tonnes for the rest of the year.

It’s unclear whether this is an effort to curb the overstock of steel or part of a broader adherence to cutting production and emissions.

“I think China is fully aware of weaker domestic steel demand this year and will use executive power to force mills to cut production as it has done before,” said Alex Reynolds, an analyst at commodity and energy pricing agency Argus Media. .

“If steel prices continue to fall sharply as losses extend, the Chinese government can set exact 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 Beijing’s looser monetary policies should also play a role in resuming steel demand in the future.

Meanwhile, others in the steel supply chain, such as Australian and Brazilian iron ore miners, need not worry for the time being, as lower mine output has offset lower demand, she said.

But miners are concerned about bearish conditions in China, Wang added.

“High pig iron production means demand for iron ore is solid. Iron ore stocks in China’s main ports have been falling since the Chinese Lunar New Year holiday,” she says.

Iron ore prices have fluctuated between $130 and $150 a tonne over the past two months, compared to prices as low as $30 to $40 a tonne during the 2012-2016 slump.

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