- Many mills put on maintenance as margins shrink
- Iron ore prices lose steam with blast furnace shutdowns
- Steel demand likely to improve in H2 on govt stimulus
- Indirect steel exports rising on global inflation
Morning Brief: In the first half of 2022, steel prices in China continued to decline and many steel companies have initiated production stoppage for maintenance and to actively control production capacity. As per China Iron and Steel Association (CISA) data, 23 steel mills have recently stopped production for maintenance, and the longest maintenance time is as long as 80 days.
“Production control is the only way to solve the current steel market problems. It can not only reduce raw material demand but also sales pressure, inventory and losses, while restoring industry profits,” said Wang Xingtao, an expert in the steel market group of CISA.
As per SteelMint data, China’s steel production in H1CY’22 stood at 526.9 million tonnes (mnt), down 6.5% in the same period last year. In January-June this year, Hebei and Jiangsu were the leading steel-producing provinces at 111 mnt and 62 mnt, down 8% and 3% y-o-y, respectively. Production in Shandong fell 19% on the year to 37 mnt even as Liaoning recorded total output at 37 mnt, down 7% y-o-y.
With limited production capacity of Chinese mills, international iron ore prices also inched lower. Between 18-22 July, 2022 iron ore prices fell by about 6%. Prices have fallen by nearly 20% in the past month.
Mills put on maintenance
In late July, CISA released a list showing that at least 23 iron and steel mills were shut down for maintenance. Amid weak market conditions, steel mills are opting to suspend production, with companies such as Baotou Steel, Tianjin Iron Works, Shougang Qian’an Iron and Steel and Tangshan Ruifeng ranking in that list.
Some blast furnaces of mills such as the Laiwu branch of Shandong Iron and Steel Group, Laiwu Special Steel and Jiangxi Jiujiang Steel Plant have been put on maintenance, which is inevitable for survival under current conditions. Since the beginning 2022, the external demand environment has deteriorated. Customs data show that from January to June this year, China exported 33.461 million tonnes (mnt) of steel, a decrease of 10.5% y-o-y.
In contrast, China’s indirect exports of steel have increased to an extent. In H1CY’22 the export value of mechanical and electrical products increased by 4.2% on the year, accounting for 49.1% of the total value of China’s foreign trade. Total exports of automobiles stood at 1.218 million, an increase of 47.1% y-o-y, while exports of excavators increased by 72.2% and the export volume of loaders increased by 19.5% y-o-y, showing strong growth momentum.
Iron ore enters bear zone
At a time when major steel mills have shut down blast furnaces, iron ore prices have also slipped. According to data, the imported Fe58% Australian iron ore fines index stood at $83/t, down $6/t on 22 July compared with last week (11-15 July). Fe62% Australian block index was at $99/t, down $5/ton from last week.
“The iron ore at ports has basically lost its liquidity,” said a steel trader. “When the price of iron ore was $100/t before, we could still see Indian iron ore in addition to Australia and Brazil at the ports. Now that the price has fallen, Indian iron ore is no longer profitable for sale to China.”
At present, the domestic iron ore market has entered a period of storage accumulation and port inventory has been rising for three consecutive weeks. On the demand side, the steel industry is in a severe operating situation. The supply and demand pattern is weak and, at the same time, the European Central Bank and the Federal Reserve are raising interest rates, which is bad for commodities. The iron ore market is expected to remain weak and fluctuate in the short term.
The first meeting of the China Mineral Resources Group Co., Ltd. was held in Beijing on 25 July. It is understood that the establishment of the Group is a major measure taken by the Party Central Committee and the State Council to make good use of both domestic and international markets and resources to enhance the supply guarantee of important mineral resources.
Demand projection for H2
Since May, Chinese steel prices have fallen by nearly RMB 1,500/t ($222/t). The price of hot-rolled coil (HRC) has fallen back to the level last seen in June 2020, only about RMB 400/t higher than the lowest point seen during the pandemic. Therefore, the industry has once again reached the threshold of loss.
However, in H2CY’22 the economic stabilisation policy of the government will achieve practical results and the demand for steel will improve.
In the second half of the year, infrastructure investment is expected to accelerate again and the growth rate may reach double digits. The State has frequently released positive signals to rev up the real estate industry. In H1 of this year various regions introduced nearly 500 optimised real estate policies. In H2 the operation of the real estate industry may marginally improve.
The government is trying to boost the real estate sector through stimulus measures but the debt crisis in the sector has made policy formulation difficult. The mortgage loan crisis is difficult to resolve as buyers in many cities are withholding payments on unfinished homes. While new home starts have fallen sharply, according to one estimate real estate sales this year may fall in the range of 27-33%.
China’s construction industry accounts for over a third of total steel demand. So as the government extended support to the real estate industry, coking coal and iron ore futures on the DCE rose by 8% and 7%, respectively.
The automobile industry will promote consumption policies with the recovery of the supply chain and the halving of vehicle purchase tax. The production and sales situation will continue to improve in H2. So, overall steel demand will be better in H2.
Why are indirect steel exports rising?
As the pandemic situation improves, so does the stability of the supply chain in the manufacturing industry. The supply chain in the international market has been impacted due to the situation in Ukraine. Insufficient supply is a major factor behind high prices, which further enhances the substitution effect of Chinese commodities in the international market. It is precisely because of this that despite the deterioration in export sentiments this year, China’s indirect exports of steel are still very resilient.
At 7.6 mnt, steel exports in June increased by 17% on the year, while in May it had increased by 37.6% y-o-y at 7.8 mnt, as per SteelMint data.
With global prices remaining high there has been an increase in demand for Chinese goods. European and American countries will increase their dependence on Chinese commodities, including mechanical and electrical products. This will make China’s steel exports, especially its indirect exports, very resilient.
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