China's key provinces see crude steel output cuts slowing

• Lesser capacity control pressure seen on steel mills
  
  
• Pig iron output stable over Jan-Oct
  
  
• Production cuts to continue amid low demand, decarb drive
  
  

Morning Brief: China's top seven crude steel-making provinces showed a -2% y-o-y drop in production over January-October, 2022, as per data maintained with SteelMint. The volume in the first 10 months of 2022 dropped to 861 million tonnes (mnt) from 880 mnt in January-October, 2021.

Amongst the seven provinces, Hebei is the largest producer at 182 mnt. However, production volume dropped -4% in the period under review from 190 mnt seen in the corresponding period last year (CPLY).

The province that experienced the highest drop was Shandong. Its volumes dropped -6% to 61 mnt in this period against 66 mnt in CPLY.

The second-highest drop was seen in Hebei, followed by Liaoning, where output dropped -3% to 62 mnt, from 64 mnt in CPLY, followed by Hebei.

Jiangsu, the second-largest province in China, and contributing over 10% of China's total crude steel production, houses numerous electric arc furnaces (EAFs). Its crude steel production dipped -1% y-o-y to 101 mnt over January-October against 100 mnt in CPLY.

Production decline rate slows
However, it may be noted that the rate of decline in crude steel production from these seven key provinces has slowed. For instance, the drop was -6% over January-August, 2022. It slowed to -3% in January-September and to -2% over January-October.

Due to the strong demand expectations in the peak season, the inclination of steel mills to resume production was significantly enhanced, thereby promoting a sharp y-o-y recovery in steel production. Thus, the average daily output of crude steel in September was 2.89 mnt, up 7.1% m-o-m, and the crude steel output and daily output levels in September showed double-digit growth for the first time, y-o-y, as per sources.

Moreover, last year, there was strict capacity control and these key provinces were trying to reach the guided target even up to the year end. This year, in the first quarter, output had already declined significantly due to poor market conditions. So, in the latter half of the year, pressure on output control is not as much as last year, SteelMint understands.

Factors still keeping production low
But, production has still remained low due to several factors:-

1. Overcapacity pressure persists: Crude steel production is expected to remain above 1 billion tonnes in 2022. The country's Ministry of Industry and Information Technology has said that during the "14th Five-Year Plan" period, China's steel industry still has overcapacity pressure. In the past two years, the steel capacity replacement projects have been put into operation, which have also replenished a large portion of the replaced capacity.

2. Lockdown blues: China had been in the grip of Covid on and off in 2022 which led to severe lockdowns and thus a drop in domestic demand as well as production. This scenario goaded mills to export aggressively as well, to make up for the loss in home demand.

3. Realty sector crash: The country's property sector crashed with the collapse of real estate giant Evergrande late last year. Since then, the real estate construction sector, which is the largest consumer of steel along with infrastructure, has been beset by trouble although the Chinese government is offering policy support to pull it out of the abyss. Real estate investment did not improve significantly in January-August, showing a negative growth of -37% in newly started projects.

4. Decarbonisation drive: The Chinese government has decided to maintain an annual decline in its crude steel production to reduce the carbon footprint. It aims to keep its 2022 crude steel output at levels lower than 2021's. The world's top steel producer had reduced 2021's production by around 30 mnt to 1.035 billion tonnes (bnt) against 1.065 bnt in 2020.

However, it should be noted that since 2017, more blast furnace capacity has been replaced with less polluting electric furnace capacity.

Pig iron output stable y-o-y in Jan-Oct
Pig iron production in China was recorded at 727 mnt in January-October. Production volumes were mostly stable with a marginal 1% drop y-o-y compared to 734 mnt in CPLY.

Hebei emerged as the largest pig iron producing province with 167 mnt in the period under review, down 1% y-o-y. Following this was Jiangsu with 83 mnt (-1%), Shandong with 60 mnt (-6%) and Liaoning with 59 mnt (-2%). Meanwhile, Anhui was the only province that recorded a rise of 3% in output at 25 mnt in the January-October period.

Outlook
It is expected that the crude steel production in November will be significantly reduced due to climate constraints, but may still show a y-o-y growth trend. According to sources, there can be daily output of 2.8 mnt crude steel in October and 2.7 mnt in November and December, which will bring about small reductions in overall output.

Policies will continue to support economic growth in 2023. But, in 2022, the y-o-y decline in land acquisition will be more than 30% and as high as 57%. Driven by the sustained decline in land acquisition area, it will be challenging for real estate investment to get out of negative growth territory in the short term.

In addition, the slowdown in global demand will also restrict direct and indirect exports of steel.

Thus, it is expected that the overall steel demand will still show a contraction in 2023 and not support high production levels.