Amidst continuing reports of an economic downturn with little or no sign of improvement now comes a report that the Chinese Government has suspended the system allowing approval of new steel plants. It is a move that could have significant implications for the Chinese steel industry and global steel manufacturing as a whole.
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According to Bloomberg, China&#;s Ministry of Industry and Information Technology recently stated that it had decided to pause the current mechanism wherein new steel plant construction was allowed as long as steelmakers first shut down some of their existing facilities. The ministry also mentioned plans to create a new approval process, but provided no timeline. For years, the Chinese Government has insisted on eliminating existing capacity as a pre-condition before allotting permission to construct a new plant.
Seems like those rules are history, for now.
The move surprised almost everyone in the steel sector, but resulted in mostly muted reactions. As frequently reported by MetalMiner in the past, steel exports from China have shot up in the last couple of years and currently stand at their highest rate since .
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China is the world&#;s largest steel producer, accounting for over 50% of the global output, or roughly a billion tons a year. But post-COVID, Chinese steel mills struggled to find domestic customers and are now resorting to dumping cheap steel products into as many markets as possible. In response, many of those countries&#; steel industry leaders continue to protest.
According to one estimate by the Bank of America, five Southeast Asian countries, including Vietnam, Thailand, and Malaysia, absorbed 26% of China&#;s steel exports in alone. Steel manufacturing titans like ArcelorMittal SA, too, have complained about these exports. Furthermore, the lack of concrete measures announced at China&#;s high-profile Third Plenum dimmed hopes that the country&#;s struggling property sector would recover from its downturn.
Credit: Casimiro, Adobe StockIn fact, just a few days ago, Hu Wangming, head of China Baowu Steel Group Corp., told employees at the company&#;s biannual meeting that conditions in the country were like a &#;harsh winter&#; that could become longer and colder and even more difficult. He also warned that China&#;s steel industry faced a situation worse than the crises it endured in and .
The aforementioned Bloomberg report also covered the Chinese Ministry warning that the steel industry was staring at challenging times, particularly in terms of the supply and demand relationship. It stated that numerous problems still remain, such as inadequate policy implementation and imperfect supervision and implementation mechanisms.
With domestic steel consumption down, iron ore prices have fallen substantially, losing about 10% this quarter and touching their lowest point since . So far, ore prices have dropped by over 28% in .
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One of the biggest disappointments for Chinese steel mills has been China&#;s property sector, which continues to be sluggish despite best efforts made by the government to pull it out of its quagmire. In an interview with CNBC, Sabrin Chowdhury, head of commodities analysis at BMI, said that Chinese demand for steel and iron ore remains disappointing because the ongoing downturn in China&#;s property market negatively impacts industrial metals needed for infrastructure.
Credit: zhu difeng, Adobe StockAccording to a recent report from Greece&#;s Ursa Shipbrokers, China&#;s steel industry suffers from weak demand, lower profitability for mills, and government directives to limit annual production growth. Ursa&#;s analysts highlight that only 5% of Chinese steel producers are in profit today, especially as steel prices continue to plummet, with rebar futures reaching a four-year low. The continued downturn in the country&#;s property sector, which has seen a 10.2% drop in investment, has significantly reduced steel demand.
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From sourcing strategies to long-term steel price projections, MetalMiner&#;s Monthly Metals Outlook report covers it all. Grab your free sample report and subscribe here.
Demand for steel is stalling in China as a correction gathers momentum in the country's real estate market. As China is the largest steel producer in the world, accounting for about half of global output, this situation is causing repercussions not only in China but also in other countries through inter-industry linkages.
Crude steel produced in China reached 779 million tonnes in , accounting for 48.5% of the total global output of 1,606 million tonnes in that year (Table 1). Six Chinese manufacturers find themselves on the list of the world's top 10 steel companies (on a production basis). They include the Hebei Steel Group (third), the Baosteel Group (fourth), the Wuhan Steel Group (fifth), the Shagang Group (seventh), the Ansteel Group (eighth), and the Shougang Group (ninth) (Table 2). The iron and steel industry ranks with electronics, chemicals, and machinery as China's key industries, with operating income reaching 8,860 billion yuan, or 15.6% of the country's gross domestic product (GDP) in ("The State of the Iron and Steel Industry in ," released by the Ministry of Industry and Information Technology in February ).
Table 1: World Top 10 Crude Steel Producing Countries ()RankCountryCrude steel productionThe driving force behind China's steel output is domestic demand. Steel consumed by downstream Chinese industries amounted to 686 million tonnes in . By industry, the construction industry consumed 380 million tonnes of steel (55.4% of total consumption), the machinery industry used 144 million tonnes (21.0%), and the automobile industry consumed 47 million tonnes (6.9%) (Table 3). Among these industries, construction accounted for more than half of the steel consumed in China. Steel consumption has grown rapidly in China's automobile industry, reflecting a surge in the number of vehicles sold in recent years. However, the industry's share of total steel consumption is still low, compared with the construction industry.
Table 3: Steel Consumption in China by Industry () ConsumptionChina's iron and steel industry has strong links with upstream industries, such as the iron ore and energy industries, located upstream. In the first place, China is the world's largest importer of iron ore, accounting for two-thirds of the global import market for the material, even though it is also the largest iron ore producer in the world (World Steel Association, "World Steel in Figures ," released in May ). The iron and steel industry is also the biggest consumer of electricity in China, accounting for 10.2% of electricity consumed in the entirety of China and 14.0% of electricity used by the country's secondary industry (both figures are based on data for the period from January to May , taken from "Summary of Electricity Industry Operation in January-May " released by the China Electricity Council) (Note 1). Moreover, electricity consumption shows high elasticity to steel production. Reflecting this tendency, a strong link has been observed between electricity generation and crude steel production, with electricity generation rising faster (slower) than the economic growth rate when crude steel production growth surpasses (falls below) the economic growth rate (the real GDP growth rate). (Figure 1) (Note 2). Growth in electricity generation has recently fallen below the economic growth rate as crude steel output stalls.
Note: Figures for are for the first quarter only.
Source: Compiled by the author based on China Statistical Abstract released by the National Bureau of Statistics of China, and "Economic Development in the First Quarter of : Stable and Sound," which the National Bureau of Statistics of China released on April 16,
Figure 1: Changes in Real GDP, Crude Steel Production, and Electricity Generation in China
Compared with domestic demand, China's steel exports and imports are relatively modest. Nonetheless, China was the largest steel exporter and the sixth largest steel importer in the world in , with exports and imports amounting to 61.5 million tonnes and 14.8 million tonnes, respectively (World Steel Association, "World Steel in Figures "). There was, however, a huge difference in the per-tonne prices of steel China exported and imported in . The price of exported steel was $854 per tonne and $1,211 per tonne for purchased steel ("The State of the Iron and Steel Industry in ," released by the Ministry of Industry and Information Technology in February ). This disparity reflects the fact that China mainly exports steel that is low in processing levels and technological content, and imports steel with higher value added. Thus, while China has become the largest producer of steel, it is still far from being a great steel power.
The iron and steel industry is vital not only for China but also for the world and has strong links with other industries. Thus, changes in China's steel market have significant implications on the performance of many multinational corporations and, by extension, the economies of other countries. First, China is both a competitor and an important market for steel companies in other countries. Second, market conditions in China's steel industry greatly affect exporting companies in resource-rich countries through the demand for, and by extension, the prices of such resources as iron ore and coal. In addition, the transportation of iron ore and coal has been a major source of revenue for shipping companies, and trends in shipping of these resources have been the most important factor in determining ocean freight.
Until recently, the construction boom in China has driven the global economy through brisk demand for steel. However, led by the housing market, the real estate market in China has been in a correction phase since early . Reflecting this change, steel production and electricity generation growth rates have slowed in China. Prices of iron ore and coal, as well as the Baltic Dry Index, have weakened in international markets, too. The correction of China's real estate market is set to continue for some time to come. This will act as a factor delaying the global economic recovery, not only through a slowdown in China's economic growth but also through a slowdown in steel production.
The original text in Japanese was posted on July 11, .
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