China's crude steel output rises 3% in Jan-Aug'23; volumes may drop in Q4

• Steel production reaches 713 mnt in 8MCY23
  
  
• Production rises on robust exports, firm infra and manufacturing demand
  
  
• Production cuts in Q4CY23 may support steel prices
  
  

Morning Brief: China's crude steel output from its top seven producing provinces rose by 3% over January-August, 2023 compared to the same period of last year, as per SteelMint data. Total volumes touched 713 million tonnes (mnt) in the first eight months of 2023 (8MCY23) against 693 mnt in the corresponding period of 2022.

China's crude steel production has remained high throughout this year. Worldsteel data shows that volumes were higher by 4.1% in January-April, 1.6% over January-May and 1.3% in January-June. There has been no official announcement on production cuts vis-a-vis 2022 levels. Mills have received directives to reduce output from local administrative authorities in some provinces. Yet production controls are a distinct possibility in Q4CY23.

Surprisingly, China's steel production has increased in 2023 despite the real estate sector - accounting for over 35% of steel demand - being in a debt trap. Robust steel exports have been a major driver supporting steel production at a time when demand from the property sector has remained muted. Besides, demand push from China's infrastructure and manufacturing sectors has contributed in keeping steel production at elevated levels.

Province-wise production

Of the key steel-producing provinces, Hebei is the largest, within which Tangshan is the most important manufacturing region. Production in Hebei over January-August this year increased 4% y-o-y to nearly 154 mnt versus 148 mnt in January-August 2022. Apart from periodic production controls, such as restrictions on sintering operations, stemming from the provincial government's 'air quality control' measures, overall steel output has remained firm.

While production in Jiangsu has increased 5% y-o-y to around 85 mnt, Shandong's steel output rose by 6% to 51 mnt in 8MCY23. Other key provinces such as Liaoning and Guangxi also witnessed growth in steel production during the period.

Market overview

Demand drivers: The Chinese government has introduced supportive policies in the property and infrastructure sectors. A seasonal uptick in the manufacturing industry is expected after the Golden week holidays. The automobile and home appliances downstream sectors are key drivers of export growth. The shipbuilding sector also represents a growth opportunity. China's steel exports in 8MCY23 rose a healthy 29% to over 59 mnt compared to 46 mnt in the same period in 2022. Competitive steel prices, along with efforts to boost the Belt and Road projects, led to high exports.

Capacity utilisation: Hot metal production in the last week of September was recorded at an average of 2.49 mnt/day. Mysteel's survey shows that utilisation of the BF mills stands at over 93% and stock replenishment demand is expected from the downstream sectors post holidays. However, the utilisation level of EAF mills is just about 53%. Scrap availability has been tight amid general economic slowdown, while electricity prices have been high across China amid droughts in key regions and lower hydropower generation.

Outlook

It is expected that China's crude steel production in October will decrease primarily due to the potential implementation of production control policies. Also, the winter heating season will commence in Northern China. Many steel mills are operating at a loss and this will drive efforts to reduce production.

Export volumes may also fall in Q4CY23 if production declines. This should be generally supportive for steel prices in Q4. Moreover, current high raw material prices, low inventory, and expected restocking after the holidays are expected to keep steel prices supported.