The steel crisis in China continues to show no signs of improvement and is even becoming more serious, according to VnEconomy citing sources from Bloomberg.
The prolonged decline of the Chinese real estate market has weakened the largest source of demand for steel producers in the country – an industry with an annual output of billions of tons.
Currently, the real estate crisis in China has not shown any signs of ending. Therefore, steel prices in the country continue to plummet, the profits of steel producers continue to shrink, and authorities have not provided any significant support measures for the industry as the Chinese government focuses on long-term economic restructuring.
China has not yet presented any breakthrough solutions to the real estate problem, and there has been no surge in infrastructure investment to maintain steel consumption. While the government is focused on promoting consumption and high-tech industries, steel demand in the country is projected to decrease this year.
“There’s not much good news for the Chinese steel industry, and the real estate recession in the country will last for many more years. The Chinese government has made it clear that their current stance on stimulating demand is very different from before,” said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd.
The steel overcapacity crisis in China has global implications, with iron ore prices being pushed down and the country boosting steel exports, leading to trade conflicts.
Here are the 4 main features of the Chinese steel industry crisis:
Declining Demand
The main cause of the stagnation in the Chinese steel industry is the prolonged real estate crisis. Steel demand for construction in China is projected to decrease by 10% this year, according to Kallahnish. This decline will reduce the share of the real estate sector in the total steel demand in China to about 1/4 – a very low level compared to the average of the past two decades.
Conversely, the demand for steel in other sectors in China is still growing, such as the appliance and shipbuilding industries. However, the demand for steel in these sectors is not yet large enough to offset the decrease in demand for steel in the real estate sector. Kallanish forecasts a 1% decrease in total steel demand in China in 2024.
“The steel demand is really weak. While China’s heavily indebted localities are still focused on debt reduction, and with not many feasible projects, investing in infrastructure is not ideal at this time,” said analyst Wei Ying of China Industrial Futures Ltd.
Steel Price Decline
The slow steel demand has led to a recent decline in steel prices. The price of construction steel is currently at its cheapest since 2017, while hot-rolled coil steel used in automobiles and appliances has hit a 4-year low. Many higher-cost producers are currently losing money on every ton of steel produced.
Other factors are also putting pressure on steel prices. The Chinese government’s introduction of new quality standards for construction steel could make existing inventory more difficult to sell. According to research company Mysteel Global, this has caused some steel dumping before the new regulations come into effect in September of this year.
Impact on Global Steel Market
ArcelorMittal SA, the world’s largest steel producer outside China, has stated that the strong flow of steel exports from this Asian country is a problem for the global steel industry, pushing steel prices in the US and Europe below production costs. China’s steel exports are currently at their highest rate since 2016, and many countries’ governments share Arcelor’s concerns.
Chilean steel producer and iron ore company Cap SA plans to close its plants, stating that the new tariffs imposed by the country on Chinese steel products are not enough to ensure profitability for steel production in Chile.
Impact on Iron Ore Prices
The decline of the Chinese steel industry has affected global iron ore prices this year, negatively impacting the business performance of mining giants such as BHP Group Ltd. and Rio Tinto Group. Iron ore futures contracts in Singapore have decreased by over 25% since the end of 2023 and remain below the important $100/ton threshold.
The volume of iron ore inventory at Chinese ports usually decreases during the mid-year period. However, this year, the inventory has been increasing every month, reaching over 150 million tons. The increase in iron ore stocks will put pressure on the price of iron ore, especially with increasing demands for more production cuts at steel mills in China, including pressure from the country’s government to limit emissions.
Vicky Wei, chief analyst at Horizon Insights research company, stated that some Chinese steel producers have recently significantly reduced production, helping to alleviate the imbalance between supply and demand. However, in the near future, the demand for steel in China is unlikely to improve “unless new stimulus measures are implemented,” Wei said.
