China's crude steel production continues to fall in Jan-Oct. Mills cautious on long term

• Oct production spurts on higher steel prices
  
  
• Carbon goals, protectionism pressure supply
  
  
• Nov may dip on maintenance shutdowns
  
  

Morning Brief: The decline in China's crude steel production continued. Over January-October, 2024 (10MCY'24), it fell 3% to 850 million tonnes (mnt) compared to 877 mnt in the corresponding period last year (CPLY), as per data NBS maintained with BigMint. M-o-m, October output, however, rose 2.9% to 81.9 mnt.

Province-wise break-up

The top five among the key seven crude steel producing provinces continued to record a decline in this period.

Hebei, the largest producer amongst the seven, after showing flat growth over the first two months, continued to decline from March, recording a 6% y-o-y drop over January-October. Jiangsu, the second-largest producer, and housing the largest number of electric arc furnaces, saw volumes remaining stable since April-May and then slowing. In January-October, the drop was 3%. The others showing a dip in 10MCY'24 were Shangdong (-2%) Liaoning (-5%), and Shanxi (-6%). Production at these five provinces dropped 5% y-o-y to 446 mnt from 469 mnt in CPLY.

Factors impacting China's crude steel production

Stimulus spurs output m-o-m: M-o-m, China's crude steel output rose almost 3%, spurred by the unveiling of a new stimulus package in September, that especially offered support to the financing and property sectors. Buoyed by the initial euphoria of possible positive impact of these measures, prices of ferrous commodities experienced a quick recovery. For instance, benchmark HRC prices in Tangshan rose 11% m-o-m to RMB 3,655/t ($503/t) in October, from RMB 3,298/t ($454/t) in September. Likewise, rebars rose a similar percentage to RMB 3,678/t ($506/t) from RMB 3,325/t ($458/t). Chinese mills also broke out of their deep discounting stupor to raise HRC export offers over 12% in October m-o-m to $519/t FOB

Mills cautious as demand fails to match prices: However, soon, the market euphoria started subsiding, as demand did not pick up on the heels of the stimulus package and the mills' strong zeal for production started dissipating as this was becoming a hindrance to margins yet again. Thus, mills were back to cautiously controlling production yet again, since unbridled production can again gnaw away at the fragile profit margins. In fact, Tangshan's rebars dropped 9% m-o-m in November while HRCs dipped 1%. Export offers too subsided by over 4% m-o-m to $497/t in November.

Looking at 10MCY'24, the sustained lack of demand, since the collapse of the steel-guzzling real estate construction sector, has been undercutting production for the better of 2024. Supply surplus in China during the first three quarters of this year caused profit margins among domestic steelmakers to narrow substantially, sounding an alarm for mills to exercise caution in planning production.

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: Several anti-dumping investigations from regions/countries like the European Union, Vietnam, Turkiye and Malaysia will ensure that Chinese steel exports will taper off in the medium-to-long term as economies move in swiftly to give a leg-up to their domestic mills. US President-elect Donald Trump's arrival at the White House may also bring fresh tariff challenges for China. Keeping itself armed for any future trade battles, China launched a second salvo of stimulus measures in November. Possibly, more are in the pipeline. With a question mark looming large over future steel exports, amid an already emaciated domestic market, Chinese mills are exercising supply-side prudence.

Outlook

With the market frenzy cooling yet again, the NDRC warned that unless additional positive policies are introduced, China's steel market may face further challenges amid the demand dip usually associated with winter.

The short-term outlook suggests potential inventory stabilisation, continued moderate crude steel production, and increased finished steel output as Chinese exports gather year-ender steam. Plus, there is the pre-Lunar New Year domestic restocking that mills can look forward to early next year.

November may also possibly see crude steel production slowing m-o-m as some mills opted for maintenance shutdowns.

Global economic and domestic policy uncertainties may impact the sector too.