- China’s largest steel producing province, Hebei, observes a fall of 12%
- Covid, decarb goals lead to output drop
- Recovery expected in second half
Morning Brief: China’s top seven steel-producing regions have shown a cumulative 9% drop in production for January-May, 2022. Total volumes in this period touched 435.02 million tonnes (mnt) against 476.5 mnt seen in the same period in 2021.
While volumes from the top-most producing province, Hebei, showed 12% y-o-y drop at 90.6 mnt, the steepest 21% fall was recorded by Shandong, at 29.57 mnt. The second-highest crude steel producing province, Jiangsu, saw a 7% drop to 50.8 mnt in this period.
As per China’s National Bureau of Statistics, the country’s crude steel production over January-May, 2022 dropped 8.7% y-o-y to 435.02 mnt.
The reasons for the drop in production can be attributed to a few reasons:
1. Covid surge impact on production: China was in the throes of its worst-ever Covid surge in May and resorted to draconian lockdown measures which impacted its steel mills as well as user-industries.
The strict lockdown in the country’s top steel-making city, Tangshan, hit overall production.
In May 2022, the country’s crude steel production dropped 3.5% y-o-y to 96.60 mnt as per worldsteel data.
Iron ore imports in January-May, 2022, dropped to 447 mnt, reveals data maintained with SteelMint against 472 mnt seen in the same period in 2021, denoting the drop in demand from steel producers.
Mills, hedged in by squeezed margins, also opted for lower grades of ore.
2. Rising energy prices impact growth: High energy prices impact Chinese mills, especially those that produce steel through the power-intensive electric furnaces. Hebei province had seen the most EAFs approvals, with a total capacity of 7.4 mnt per annum. It was followed by Jiangsu province, with 4.4 mntpa of new EAF-produced steel. As per reports, Jiangsu increased power tariffs in May for nearly 30 large factories either because they missed energy efficiency targets or were using outdated equipment. This happened against the backdrop of soaring global coal and gas prices following Russia’s invasion of Ukraine.
Moreover, in efforts to meet its decarbonisation goals, China has been encouraging a hike in coal-based power tariffs for industrial users.
3. Production cuts and decarb goals: After reducing around 30 mnt of crude steel production in 2021, China had announced that it would keep its crude steel output in 2022 lower than last year’s level. The country closed 2021 with a crude steel output of 1.035 billion tonnes.
The production cuts dovetail with China’s decarbonization goals, wherein it plans to achieve carbon peaking by 2030 and neutrality by 2060.
4. Games and blue skies impact: Earlier in the year, China was hosting the Winter Olympics (4-20 February, 2022), whereby it had adopted a blue skies policy. Tangshan, China’s top steel-making hub, was directed to extend its production curbs till 13 March this year to ensure good air quality during the Games. Strict measures led to February crude steel production dropping to 75 mnt, the lowest in January-May.
Outlook
With effective measures to control Covid, and introduction of a slew of national policy measures to revitalize growth, China seems to be on an economic recovery path. There is a pronounced accent on infrastructure construction. This may rejuvenate steel demand in the second half, which, in turn, may have a positive fallout on crude steel production.
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