China: Crude steel output at key provinces declines over Jan-Jul'24. Know why?

• Demand slump, slowed infra growth hit production
  
  
• Decarb efforts resume after post-pandemic setback
  
  
• Govt initiating slew of measures to limit output
  
  

Morning Brief: China's crude steel production fell a little over 2% over January-July, 2024 to 614 million tonnes (mnt) against 627 mnt seen in the same seven months in 2023, as per data maintained with BigMint. This drop was deeper compared to the -1.1% seen in January-June, -1.4% in January-May, or -1.9% in January-March, this year. Only January-April, 2024's drop was a steeper -3%. The first two months of the year, however, had seen a 1.6% increase.

Province-wise break-up

Four of the key seven crude steel producing provinces recorded a decline in the first seven months.

Hebei, the largest producer amongst the seven, after showing flat growth over the first two months, continued to decline from March and recorded a decline of 5% over January-July. Jiangsu, the second-largest producer, and housing the largest number of electric arc furnaces, saw volumes remaining stable since April but dropping 3% in January-July. The others showing a drop in January-July, 2024 were Liaoning (-6%), and Shanxi (-9%). Production at these four provinces dropped 5% y-o-y to 280 mnt from 294 mnt in the period under review.

Guanxi and Guangdong showed 16% and 9% increase respectively, with their combined contribution at 51 mnt (45 mnt).

Factors pulling down China's crude steel production

Weak domestic demand: A key factor forcing mills to cut production is the highly weakened steel end-user demand, which is persisting ever since the collapse of its once-mighty real estate and construction sector. The collapse was triggered by the 2021 default of the Evergrande Group, the largest real estate player globally along with other property giants because of excess inventory and new Chinese debt regulations. Eventually, a huge number of home developers started filing for bankruptcy annually since 2020. Consumer confidence nosedived and inventory overhang gained ground, leading to an eventual meltdown in the sector. Construction, which led the downstream demand charts in 2010 with 42% share, fell sharply to 24% by 2023, dragging down steel demand.

De-carbonisation goals resume: Producing more than 50% of global crude steel, China shoulders a huge responsibility towards lowering the carbon footprint, especially since the industry is the worst polluter after power. China has taken a net zero pledge by 2060 and carbon peaking by 2030. These plans got somewhat derailed post-Covid as authorities were more focused on kick-starting a ravaged economy. Exports became a prime focus for loss-making mills, which needed support from production. However, the government is resuming focus on de-carbonisation. One pointer towards this initiative is that no fresh coal-based steel projects received approved in H1CY'24. Only fresh EAFs, which use a comparatively cleaner method of steel-making, were permitted in this period.

Anti-dumping probes: Several anti-dumping investigations against China from countries like the European Union, Vietnam, Turkiye and Malaysia are also impacting production. These actions come in the wake of aggressive steel dumping by Chinese mills, forcing importing countries to adopt protectionist stances.

Infrastructure investment slows down: If mills are keen to ride infra growth, there is disappointment in store. Infrastructure spending had a huge role to play in China's meteoric rise over the past few decades. However, although overall investment in infra continued, the pace of growth slowed down, especially in the last few years. Data available with BigMint reveals, infra investment growth slowed from an average 8.55% in H2CY'22 to 8.36% in H1CY'23 and further to 6.16% in H2CY'23. The pace fell further to 6% in H1CY'24. Thus, another channel of demand has slowed, further affecting production.

Demographic changes impact consumption: Many experts feel China's crude steel demand, after peaking, has now entered a declining phase because of, amongst other factors, demographic changes. One, its population is decreasing. From a level of 1.41 billion in 2020, it is forecasted to drop to 1.39 billion by 2030 and progressively dip over the next few decades. Two, the 60-plus age group, which typically consumes lesser per capita steel, is steadily increasing within the demographic structure, as per China's seventh census. From a share of around 19% in 2020, the same has grown to about 21% in 2023 and will touch 24% by 2026 and further expand, going forward.

Outlook

China's crude steel production may decline in H2CY'24 because of the above factors. The government is implementing a slew of measures towards this end. These include production cut diktats from provincial governments, limiting of steel exports, prioritising EAFs, amongst others.