China: 4 among top 7 steel producing provinces show decline in Jan-Apr'24

• Largest producer Hebei sees 3% output decline y-o-y
  
  
• High inventories, tight margins support output cuts
  
  
• Will rising steel prices keep production firm in May?
  
  

Morning Brief: Four amongst China's top seven steel-producing provinces showed a y-o-y decline in January-April, 2024, reveals data maintained with BigMint. Overall, volumes dropped 4% to 342 million tonnes (mnt) in this period from 357 mnt seen in the same four months in 2023.

Province-wise break-up

Hebei, the largest producer amongst the seven, after showing flat growth over the first two months of the year, started declining from March and recorded a decline of 3% to 74 mnt over January-April. Jiangsu, the second-largest producer, saw volumes flattening out at 42 mnt although it had shown an increase over January-March.

Shangdong (-3%), Liaoning (-10%), and Shanxi (-13%), continued to decline with a total production of 68 mnt (74 mnt in 2023). Production at Guanxi and Guangdong rose 15% and 2% respectively with their combined contribution at 27 mnt.

Factors impacting China's crude steel production

Higher inventories call for production cuts: Chinese mills had been nursing higher inventories in the initial three months of the year. Late February inventories were m-o-m and y-o-y higher. So were early and mid-March stock levels. Because of low demand, in mid-March, steel inventories of key mills were at nearly 20 mnt, the highest since the beginning of 2024 and also the highest level compared to the same period in the past four years, second only to 21.41 mnt recorded during Covid in 2020. Thus, mills were forced to cut production to allow for the stock depletion. The China Iron & Steel Association (CISA) also called on steelmakers across the country in early April to reduce production to balance out supply and demand.

Steel demand still languishing: Demand from the highest consuming segment (60%), real estate construction, was slow. Many said, builders appetite for construction steel was slow over January-March. A substantial portion of real estate and infrastructure construction companies, around late April did not show much inclination to stock up.

Downstream demand failed to perk up in the post-Spring Festival period, which was followed by another slow period of the Qinming holidays in early April. Apparent consumption of crude steel dropped more than the decline in production in Q1. According to data from the National Bureau of Statistics, Q1 crude steel production declined nearly 2% y-o-y, but apparent crude steel consumption showed a y-o-y decrease of 4.7%. This further encouraged mills to keep production down.

Margins squeeze encourage production cuts: China's ferrous metal smelting and rolling processing industry witnessed a 4.2% y-o-y decline in revenues over January-April. Domestic steel prices fell steadily every month, squeezing margins, giving mills another good reason to rationalise production. In Tangshan, benchmark HRC prices fell 6% from RMB 4,127/t ($570/t) in January 2024 to RMB 3,889/t ($537/t) in April 2024. Benchmark rebars also fell 6% from RMB 3,883/t ($536/t) to RMB 3,655/t ($505/t).

Steel exports rise, but offers fall: Steel exports rose a handsome 27% to 35 mnt in January-April, 2024. However, export offer values fell sharply. For instance, HRC export offers to the Middle East fell 10% from $619/t CNF Abu Dhabi in January to $559/t in April. Similarly, offers to Vietnam fell 9% to $555/t CNF HCMC from $609/t in this period.

On a y-o-y basis, Chinese HRC export offers fell more than 16% to $554/t FOB ($663/t) over January-April, 2024.

The drop in value impacted mill's bottomline, encouraging the production cuts.

Outlook

The steel market staged a slight rebound in May. Domestic prices plus futures showed an uptick. Export offers also registered a marginal uptick. On the flipside, prices of raw materials like iron ore and coking coal have shown an uptrend while inventories, mid-May, have also shown a slight 3% increase.

But, on a brighter note, China is keeping its stimulus momentum high.

Thus, mills may want to either keep production levels firm m-o-m or increase marginally in May, to take advantage of the rising steel prices.