China's crude steel production continues to fall in Jan-Aug'24; all eyes on latest stimulus measures

• Slack domestic demand, decarb goals reduce output
  
  
• September sees restocking demand ahead of holidays
  
  
• Market cautious, awaits peak season steel performance
  
  

Morning Brief: China's crude steel production fell 3% over January-August, 2024 to 691 million tonnes (mnt) against 715 mnt seen in the same eight months in 2023, as per data NBS maintained with BigMint. This drop was the deepest so far compared to the rest of the year. It equalled January-April, 2024's decline rate. The first two months of the year, however, had seen a 1.6% increase.

Province-wise break-up

In this period, the top five among the key seven crude steel producing provinces recorded a decline.

Hebei, the largest producer amongst the seven, after showing flat growth over the first two months, continued to decline from March and recorded a decline of 6% y-o-y over January-August.

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-August, the drop was 4%. The others showing a dip in January-August, 2024 were Shangdong (-2%) Liaoning (-5%), and Shanxi (-10%). Production at these five provinces dropped over 5% y-o-y to 365 mnt from 385 mnt in the period under review.

Guanxi and Guangdong showed 16% and 8% increase respectively, with their combined contribution at 58 mnt (52 mnt).

Factors impacting China's crude steel production

Sluggish home demand amid protracted realty collapse: 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. 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.

Manufacturing investment stumbles: Manufacturing investments were down thanks to financing curbs and also slack end-user demand. On a y-o-y basis, manufacturing investment was up at 9% over January-August 2024 from 7% seen in the same eight months last year. But the worry was that m-o-m the fall was consistent since March this year. It fell to 9.1% in August from 9.3% in July. The official NBS Manufacturing PMI in China fell to 49.1 in August 2024 from 49.4 in the preceding month, missing estimates of 49.5. It was the fourth straight month of contraction in manufacturing activity and the steepest since February amid shrinking business confidence. Automobile production growth also slowed down to -10.70% in the first eight months from -10.50% seen in January-July. The largest exporter of electric vehicles may hit a roadblock as the US has slapped a 100% import tariff on EVs.

Infra investments decline amid strict debt curbs: Infrastructure investment growth fell y-o-y as well as m-o-m for the first eight months. Over January-August, the average growth was at 5.66% again almost 8% seen in the same period a year ago. August growth dropped to 4.4% against July's 4.9%. Companies have been strictly forbidden to raise hidden debts for building municipal infrastructure assets when backed by nil or insufficient income. Also, increasing hidden debts will also not be allowed. Such diktats have had negative impact on infrastructure investment.

Decarbonisation gains currency: After an immediate post-Covid setback, China's focus on decarbonisation has resumed with renewed vigour. Steel is one of the most polluting industries, along with power, and hence, it needs to be cleaned up through greener manufacturing methods. 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.

Outlook

Post-September, the overall operation of electric furnaces was still low due to factors such as squeezed margins and difficulty in collecting scrap. As the profits of blast furnaces recovered, some began to resume production, but the overall increase was minuscule.

But demand looked up amid restocking and so did prices ahead of the National Week holidays starting 1 October. This augured well for inventories. As on 11 September, the social steel inventory in 29 key cities dipped over 5% w-o-w and 18% y-o-y.

Iron ore also spiked to $110/t CFR recently, hitting nearly a three-month high, due to fresh stimulus measures in the real estate sector.

In fact, there is much expectation from the stimulus measures recently announced. The country's central bank lowered rates on existing mortgages by 31 October as part of efforts to support the weak real estate market. This statement followed Beijing's latest and largest stimulus package since the pandemic. Besides, key housing purchase restrictions were lifted in Guangzhou, Shenzhen and Shanghai. However, market optimism was cautious, since the key factor for long-term price growth remains actual demand. If the supply and demand balance sustains during the peak season of October-March, next year could mean a better performance from the steel sector.