Steel mill owners in parts of China are in a bad mood, said Beijing-based commodities consultant Simon Wu.
Steel stocks are slowly piling up in warehouses in the country’s largest steel-producing hub, the northeastern city of Tangshan, as well as in Jiangsu and Shandong provinces, factory owners told Wu, a senior adviser to analyst Wood Mackenzie.
Demand for steel is falling amid pandemic lockdowns and stunted construction activity, they said.
“There is negative energy everywhere. The steel industry just doesn’t make a profit,” Wu said.
A lot of steel — a key raw material in the powerhouse of manufacturing — lies idle across the country amid a stop-and-start economy that is driving demand and prices down.
Prices of both steel and its main ingredient, iron ore, have been volatile during the Shanghai lockdown but were on a downtrend earlier this month.
Weak demand for steel, a beacon of China’s economy, also reflected the country’s broader slowdown, although the latest data suggested some improvement as industrial production edged up 0.7% yoy in May.
Crucially, China’s steel industry – the largest in the world – hosts extensive supply chains stretching from Chinese blast furnaces to foreign iron ore mines in Australia and Brazil, the largest suppliers of iron ore to China.
Because of this, any nervousness in China can unravel an extensive network of supply chains and potentially add further pressure to existing global disruptions.
A worker cuts steel pipes near a coal power plant in Zhangjiakou, China, 12 November 2021. The country’s biggest steel consumers and its economic growth drivers — such as real estate construction and infrastructure development — have gone quiet, according to an analyst.
Greg Baker | AFP | Getty Images
According to the China Iron and Steel Association, national daily productions of steel intermediates such as crude steel and pig iron and finished goods rose by about 1% to 3% during the month of May. In contrast, demand was still active but down.
China’s consumption of crude steel, for example, fell 14% year on year in May, said Niki Wang, iron ore head of S&P Global Commodity Insights, citing internal analysis.
“The year-on-year decline in steel demand was much larger than that in crude steel production. In this case, the steel mills are actually struggling (with the pressure on steel prices),” she said.
That period coincided with China’s largest-ever city-wide pandemic lockdown in Shanghai.
As a result, inventories are 12% higher year-on-year and could take nearly two months to fall to the median level of the past five years, assuming steel demand recovers, said Richard Lu, steel research analyst at CRU Group.
The Chinese market is also competing with a proliferation of cheaper Russian semi-finished steel billets, said Paul Lim, senior analyst for Asian ferrous commodities and steel at Fastmarkets Asia.
As the outbreaks swept the nation, the country’s top steel consumers, as well as the Chinese economy’s growth engines such as real estate construction and infrastructure development, have become silent, said Atilla Widnell, managing director of Navigate Commodities.
That’s because “there’s just nobody working on the sites,” he added, noting that the industry was surprised by the return of lockdowns.
After a much-anticipated opening of Shanghai in early June after new cases were recorded for both Beijing and Shanghai, China began to reintroduce some restrictions.
Last week, new data from the China Bureau of Statistics showed that real estate investment fell 4% year-on-year in the first five months of the year, down 2.7% between January and April.
Home sales by volume fell 34.5% year over year in the first five months of 2022.
“After China’s exit from lockdowns in early June, there were signs of life for domestic steel consumption but the ‘stop-start’ disruptions caused by a relapse into isolated lockdowns [have] an unwelcome blow to the country’s well-intentioned economic recovery,” Widnell said.
Can’t just shut down blast furnaces
Although steel prices have fallen and the profitability of steelmaking has been eroded, steel mill owners have continued production, many using lower quality iron ore to produce smaller quantities.
Chinese blast furnaces are now operating at near full capacity at more than 90% – the highest rate in 13 months – despite lower profits, analysts said.
Lu said some mills suffered “broadly negative margins” in April and May.
Price data shows that prices for popular steel products such as rebar and hot-rolled coils used in house construction have fallen by as much as nearly 30% after peaking in May last year following an industrial revival to boost the economy.
Shutting down blast furnaces can be inefficient because large reactors, which convert iron ore into liquid steel, must run continuously.
After the shutdown, it takes a long time – up to six months – before operations can be resumed.
“So Chinese operators are keeping their blast furnaces ‘hot’ by using low-grade ores to voluntarily reduce yields in the hope that they can ramp up quickly and respond to recovering steel demand when the temporary lockdowns are lifted,” he said Widnell.
“We believe these operators are also producing larger quantities of semi-finished steel products in order not to depress finished steel prices through excessive inventories.”
Wood Mackenzie’s Wu said another reason producers are moving on is so they could meet their annual allowable production targets before Beijing cuts them next year as part of efforts to meet its 2030 and 2060 emissions targets.
“Each year’s production is defined by last year’s production. Therefore, it is to producers’ advantage to produce the maximum amount of steel each year as cuts are applied to that year’s production,” Wu said.
Return of the burglary?
Steel demand and prices plummeted between 2012 and 2016 after the Chinese economy slowed sharply, causing commodity prices to fall.
For many miners supplying China, such as in Australia, this marked the end of the so-called mining boom.
In 2015 alone, China’s major steel companies suffered losses of more than 50 billion yuan.
For starters, this downturn isn’t 2015, Wu said, and steelmakers have learned to be resilient to volatility.
“So they’re going to keep making steel because they have to pay wages and maintain other cash flows. Many producers can probably go two years without making any money. Lots of people outside [of China] don’t understand this resilience,” he said.
CRU’s Lu said while some factories are considering slowing production, inventories are “far from panic levels” and storage capacity is not yet a serious issue.
However, there are early signs that the industry is beginning to adjust to these adverse conditions.
Lately, There were rumors that the Jiangsu provincial government had ordered local steel mills to cut production by about 3.32 million tons for the rest of the year.
It’s not clear if this is an attempt to curb excessive steel inventories or part of a broader push to reduce production and emissions.
“I think China is fully aware of weaker domestic steel demand this year and will use executive power to force plants to cut production as before,” said Alex Reynolds, an analyst at commodity and energy pricing agency Argus Media.
“If steel prices continue to fall sharply amid ongoing losses, the Chinese government could set precise figures for production cuts – much like OPEC did when Covid peaked in 2020-2021.”
S&P’s Wang agreed, adding that stimulus from Beijing’s looser monetary policy should also play a role in steel demand’s eventual revival.
Meanwhile, others in the steelmaking supply chain, such as Australian and Brazilian iron ore miners, need not worry for the time being as lower production from the mines has offset lower demand, she said.
But miners are still 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 major ports have been declining since the Chinese Lunar New Year holiday,” she said.
Iron ore prices have hovered between $130 and $150 a tonne over the past two months, compared to prices of just $30 to $40 a tonne during the 2012-2016 slump.