China's Jan-Nov'23 crude steel production sustains rising trend. What lies ahead?

• Jan-Oct'23 output up 2% y-o-y
  
  
• Higher production aims to bolster GDP growth
  
  
• Medium term hinging on global macro-indicators
  
  

Morning Brief: China's crude steel output maintained the y-o-y rise over the first 11 months this year, with the total tonnage reaching 952.1 mnt, higher by 1.5% from the same period last year, reveals the latest release by the National Bureau of Statistics (NBS) on Friday.

In November 2023, production was at 76.1 mnt, up 0.4% y-o-y while the daily crude steel output averaged 2.54 mnt/day, edging down 0.6% compared with that for the previous month. The sustained m-o-m fall in daily crude steel output was mainly due to the fact that blast furnace mills continued to slow their production pace in November to ease supply pressure.

Production remained high through the year although it started tapering off slightly from the middle of last year, as authorities, taking note of the glut in the face of dwindling demand, adopted output control policies, even if at regional levels.

Last year, the country undertook aggressive production cut measures with an eye on emission goals. It may be recalled, China adopted a carbon peaking year of 2030 and net zero target by 2060. And steelmakers also took pre-emptive production cuts in 2022 on the back of persistent margin squeeze amid weakened finished demand and steel prices and high raw materials costs.

Jan-Oct production up 2% y-o-y

China's crude steel production over January-October, 2023 rose 2% to 877 million tonnes (mnt) compared to 858 mnt seen in the same period last year.

Hebei, the largest producing province, saw a 2% y-o-y increase to 185 mnt (182 mnt) in this period while Jiangsu's rose 4% to 103 mnt (99 mnt). Shangdong, the third-highest producer, reported a 3% increase to 63 mnt (61 mnt). Guangxi, whose contribution is not that significant at 34 mnt, saw an 11% rise (31 mnt).

Reasons for higher y-o-y crude steel production

It seems the production push in H1CY'23 contributed to the y-o-y increase.

Some blast furnace (BF) mills already took pre-emptive production cuts starting October with their profitability falling to hit intra-year lows since mid-October. BF mills in northern China were expected to reduce steel production on environmental restrictions as the northern region entered the annual winter central heating season in November.

Eye on economic growth: Most steel mills in China kept their production levels high this year in a bid to contribute to economic growth. Indeed, unlike in the last two years, the Chinese government did not officially announce curbs on annual steel production, for reducing carbon emissions. This was possibly because the government was more cautious about adopting an economic policy that would support GDP in the current year. In fact, the Chinese steel industry made certain contribution to economic growth by keeping production steady this 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 won't allow it, as doing this would hurt the local GDP and mills will also lose market share to competitors," a source said.

Expectation of demand rebound in Q1: There was expectation of a demand rebound in the first quarter (January-March) of 2023, after the Lunar New Year holidays. From the end of 2022 to the first quarter of 2023, there was a slight improvement in various global economic and trade indicators, which supported the rebound in steel demand and the significant growth of China's steel exports in the first quarter. This led mills to go on a production overdrive. However, the reality fell short of expectations as the property sector failed to regain lost ground this year.

Construction (real estate and infrastructure) demand is expected to fall a further 3.5% in FY'23 while other sectors - machinery (flat growth), automotive (3%), white goods (1%), ship-building (2%) and containers (3%) are expected to report slight y-o-y growth.

Squeezed margins, losses boost exports: A supply-demand mismatch led to decreased steel prices, contributing to the steep profit drop for China's steelmaking industry. The strong growth in steel exports largely made up for the lack of domestic demand, and helped to keep total demand boosted. In fact, steel exports became one of the powerful engines for stabilizing and increasing domestic steel production. The losses were incurred amid lack of home demand, high production costs and softened steel prices. In Q3 of 2023, total gross profits fell another 34% compared to the same quarter last year, according to CISA.

Inventory

This year's total inventory (at steel mill- and trader-level) of five major products (rebars, wire rods, HRCs, CRCs and medium plates) largely remained at a low level, indicating traders were generally cautious about building inventory while mills adopted a "fast in, fast out" strategy to keep their in-plant stocks low to reduce risks.

The low inventory greatly eased the persistent pressure of high output and low consumption through the better part of this year and thus bolstered steel prices to some extent especially towards the year-end. But this price uptick was also contributed majorly by the upbeat sentiments that emerged in the just-held "work conference".

Outlook

China's CY'23 crude steel production could inch up from 1.018 billion tonnes (bnt) in CY'22, potentially ending the year slightly higher, with output till November already at 952 mnt, as per SteelMint estimates.

Steel supply by Chinese BF mills may decline in Q4 amid losses and winter restrictions.

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