China ends Jan-Nov'24 with 3% dip in crude steel production. What lies ahead?

• Lack of domestic demand, squeezed margins curb output
  
  
• Lunar holiday lull to restrict production in short term
  
  
• Emission goals, aging population to put caps on output
  
  

Morning Brief: China ended 11MCY'24 with a 3% dip in its crude steel production. Data maintained with BigMint reveals, volumes fell to 929 million tonnes (mnt) over January-November, 2024 against 953 mnt seen in the same period in 2023.

Province-wise break-up

The top five among the key seven crude steel-producing provinces, which contribute more than 50%, at 486 mnt, to the total, showed a y-o-y decline in this period.

Hebei, the largest producer amongst the seven, recorded a 6% y-o-y drop to 187 mnt (199 mnt).

Jiangsu, the second-largest producer, and housing the largest number of electric arc furnaces, saw volumes dipping a marginal 1% to 110 mnt (112 mnt).

Of the balance five, Shangdong (-2%) Liaoning (-4%), and Shanxi (-5%) fell as well. Guanxi (9%) and Guangdong (10%) showed y-o-y increases.

Factors that impacted China's crude steel production in CY'24

Lack of adequate domestic demand: Chinese steel mills bore the brunt of the sustained lack of demand for steel amid the real estate sector's meltdown.

The property construction sector, which consumed over 40% of steel in around 2010, saw its share declining to 24% in 2023 because of its collapse that started in 2021.

Mills take maintenance shutdowns: Chinese mills undertook maintenance shutdowns last calendar to balance out the sustained lack of domestic demand. Mills' production enthusiasm also weakened since a growing number of them suffered losses on steel sales.

Eye on carbon emission target: China is focused on meeting its carbon emission goals, which entails cleaning up steel, one of the heaviest contributors to the emission footprint. Recently, the country said, it aims to introduce 200 rules and regulations to calculate the carbon footprint of major industrial products, by 2027. Priority will be given to sectors like steel, non-ferrous metals, construction materials, new energy vehicles etc.

Cumulatively, China has already eliminated outdated capacity in both steel and coal -- about 300 mnt/year in the former and 1 billion tonnes/year in the latter. Although no timeframe has been set, China has indicated, paring steel and coal surplus to acceptable levels will take about eight years.

Global protectionism warrants output cuts: In an era of growing protectionism, it is extremely unviable for China to keep nursing its overcapacity especially when domestic demand will take time to recover to a satisfactory level. Several anti-dumping investigations from regions/countries like the European Union, Vietnam, Turkiye and Malaysia are ensuring that Chinese steel exports will taper off in the medium-to-long term as they move in swiftly to protect their domestic mills. Reduced exports will warrant production cuts.

Demographic dynamics: Another factor is changing demand patterns is China's negative and aging population growth. As per data from the China Population & Development Research Centre, "the Chinese population will experience zero and negative growth during the 14th Five-Year Plan and in the mid-long term, and it will stay at around 1.14 billion until 2035."

It may be noted that China's rapid economic growth in the past four decades has largely benefited from the demographic dividend. The change in the population structure being played out now will suppress domestic steel demand in the medium to long term.

Data from government sources available with BigMint from 2020 reveals a steady rise in the 60-plus age group. Aging population would require lesser housing or consumer goods compared to a younger generation.

Outlook

Looking at the short term, 2025 may see further production cuts as mills are expected to continue with their maintenance programmes to balance out the lull in demand during the upcoming Lunar New Year holidays.

With a question mark looming large over future steel exports, amid an already emaciated domestic market, Chinese mills are exercising supply-side prudence. That apart, continued slack domestic demand, protectionism, emission curb pressures and a rise in aging population will ensure that China will actively try to curb production to rationalise its steel overcapacity.