China's crude steel production from top 7 provinces remains flat in CY'23. What lies ahead?

• Total output falls 11% in H2 as mills run up losses
  
  
• Higher iron ore prices impact output in H2
  
  
• CY'24 production may dip amid mixed demand signals
  
  

Morning Brief: China's crude steel production flattened out in CY'23, reveals data maintained with BigMint, after two years of decline. The top seven crude steel producing provinces along with "others" showed a total output volume of 1,019 million tonnes (mnt) over January-December, 2023 against 1,018 mnt recorded in CY'22. The top seven alone also recorded a flat growth at 617 mnt in CY'23 compared to 615 mnt in CY'22. Hebei, the largest steel producing state in China, showed a 1% dip to 210 mnt (212 mnt in 2022).

On a m-o-m basis, total output in December 2023, at 66 mnt, was 13% down from 76 mnt in November.

China's total crude steel output remained on the higher side on a cumulative y-o-y basis throughout last year. But, production fell on a m-o-m basis, in all months, except in March 2023 when it spurted by 20% over February, and in June by 1% over May. In February 2023, output fell by 10% m-o-m and July saw no change. But the rest of the months saw volumes growth hovering in negative zone.

It may be mentioned that output had fallen 3% in 2021 and by nearly 2% in 2022, as the government tightened the noose on mills amid the scramble to reach emission reduction targets.

China's crude steel output scenario last year

Output falls 11% in H2: The production push in the first quarter of 2023 in anticipation of a post-pandemic demand rebound, ricocheted to an extent since the property sector, the largest steel guzzler but which has been struggling for quite some time, did not perform as per expectations. Total output in the first half (H1) totalled 538 mnt but fell to 480 mnt in H2, an 11% drop. In H2, some local authorities did opt for production curbs, especially in the Tangshan region, although the government did not officially announce any control measures.

Some blast furnace (BF) mills took pre-emptive production cuts starting October as their profitability fell to hit intra-year lows since mid-October and they were keen to offset losses resulting from higher raw material prices and subdued downstream demand. This helped to balance out the overall output volume.

Eye on economic growth: The government possibly did not announce any steel output curbs because it was more worried about economic revival and adopting a policy that would support GDP. There were also concerns regarding the ailing property sector which required some booster shots. Thus, most steel mills in China kept their production levels on the higher side last year in a bid to contribute to economic growth. In fact, the Chinese steel industry made certain contribution to economic growth by keeping production steady last year - value-added output in the ferrous mining and processing sectors rose 7.8% over January-October, being 3.7 percentage points higher y-o-y, according to NBS data.

"Steel mills, despite facing operating losses, did not cut production significantly because the government didn't allow it, as doing this would have hurt the local GDP and mills would have also lost market share to competitors," a source told BigMint.

Moreover, certain sectors, like automotive, manufacturing, ship-building and energy transition did register good growth on the back of stimulus measures which supported the high production level in H1.

Exports keep operating rate high: Since the property sector performed poorly with the real estate development growth persistently remaining in the negative zone last year, mills aggressively fell back on exports to offset the supply-demand mismatch at home, which led to losses. Thus, exports touched a record high of 90 mnt last year and helped to maintain a high operating rate for mills. In fact, steel exports became one of the powerful engines for increasing and stabilising domestic steel production.

Increased iron ore prices impact production in H2: But prices of raw materials like iron ore rose in H2 which pressured already squeezed margins and spurred mills to lower production especially from October onwards. The Fe62% iron ore fines, CFR China rose 14% to $120/tonne in H2CY'23 against $105/t in the same period in CY'22

Outlook

China's crude steel output may dip slightly in the current year as the property sector is still likely to show signs of weakness although many feel the decline has bottomed out. But, the rebound may yet take some time. The decrease in property sales is likely to narrow down in Q1 and then reverse in H2.

On the flip side, the infra sector, which performed poorly last year, may hold its head up and manufacturing may recover further. Automotive, ship-building and manufacturing may see higher exports. These demand-side aspects may support crude steel production.