China crude steel production cuts deepen in Jan-Sep'24. Disciplined approach need of the hour?

• Output sees sudden spurt in Oct amid booster shots
  
  
• Supply glut erodes margins by over 55% in 9MCY'24
  
  
• Output cuts must for steadying faltering decarb drive
  
  

Morning Brief: The decline in China's crude steel production continued to deepen m-o-m. Output fell 4%, its highest so far this year, in January-September 2024 (9MCY'24) to 768 million tonnes (mnt) compared to 798 mnt in the corresponding period last year (CPLY), as per data NBS maintained with BigMint. On m-o-m basis, September 2024 output fell 6.1% to 77.1 mnt

Province-wise break-up

The top five among the key seven crude steel producing provinces continued to record a decline in this period.

Hebei, the largest producer amongst the seven, after showing flat growth over the first two months, continued to decline from March and recorded a deeper 7% y-o-y drop over January-September. Jiangsu, the second-largest producer, and housing the largest number of electric arc furnaces, saw volumes remaining stable since April-May and then slowing. Over January-September, the drop was 3%. The others showing a dip in 9MCY'24 were Shangdong (-2%) Liaoning (-5%), and Shanxi (-9%). Production at these five provinces dropped 6% y-o-y to 404 mnt from 428 mnt in CPLY.

Guanxi and Guangdong both registered 13% increase respectively, with their combined contribution at 66 mnt (58 mnt).

Factors impacting China's crude steel production

Persisting lack of demand amid realty woes: A key reason behind the steady production cuts is, of course, the decline in domestic steel demand with the collapse of the real estate construction sector, which was the largest end-user. This resulted in a sharp decline in demand for construction-related finished items for the last few years. Secondly, government restrictions on real estate financing put further strain on investments, making the recovery more difficult. The property construction sector was de-growing by over 10% m-o-m for months. Although the decline in real estate investment and new construction starts slowed down towards August, the magnitude was small and the improvement in demand was limited. Crude steel output dropped 4% in 9MCY'24, but China's apparent steel consumption in this period fell a higher 6%-plus y-o-y to 689 mnt, as per the China Iron & Steel Association (CISA).

Supply glut impacting steel margins: The supply glut has been impacting the margins of mills, prompting top officials at CISA to warn they should exercise caution in planning production. The overall profits earned by CISA's member mills in 9MCY'24 tumbled almost 56% y-o-y to RMB 29.2 billion ($4.1 billion), with 46% of these reporting losses.

The recent stimulus package from the Chinese government, aimed at boosting the property and money markets, propelled a price spurt, which prompted several mills that had stalled production, to resume, but only to stare at in-plant inventory pile-up. Indeed, with the temporary euphoria fizzling out, and prices falling back again in October amid the supply glut, the Chinese steel market failed to cheer up, with production cuts a soothing panacea.

Output cuts a stepping stone to decarb goals: Despite having taken carbon peaking and net zero pledges by 2030 and 2060 respectively, many feel, China has been faltering in its march towards decarbonisaton. After an immediate post-Covid setback, the focus resumed with renewed vigour. 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. But, having said that, slowed steel demand, low recycling rates and sustained over-capacity have been obstacles in the path to a greener future. The steel industry, globally, contributes 8% to carbon emissions and the onus on China to clean up its act is enormous since it produces more than half the entire world's crude steel. Here again, output rationalisation is a stepping stone to decarb goals.

Lower infra spend impacts steel demand: Infrastructure investments down-trended 7% m-o-m and a significant 25% in 9MCY'24. China is likely to fall roughly RMB 6.5 trillion short of the investment necessary to reach its 5% GDP growth target for 2024. Government spending has been reined in as 12 regions with high debt have been instructed to slow down or suspend infrastructure projects to reduce their debt burdens. Plus, extreme weather has been impeding projects completion. Infrastructure enjoyed 17% share in China's steel consumption in 2023. Naturally, with demand here down, production cuts make sense.

Outlook

Disciplined production regime should be the way forward or else mills will see margins narrowed further and more units shuttered. In what seems worrying, as per MySteel, by mid-October, the 247 mills within its survey ambit showed a "relatively high level" of hot metal production for this year at 2.34 mnt. It may be recalled, in June, hot metal production had reached an intra-year high, forcing a price slump over July-September. Industry participants are naturally keen to avoid a repeat of this scenario.