China's key steel-producing provinces' output dips marginally in Jan-Feb amid squeezed margins

• Largest producer Hebei records flat growth y-o-y
  
  
• Mills resort to production cuts as margins narrow
  
  
• April may see demand tempered by realty blues
  
  
• Modalities to regulate output in 2024 on anvil
  
  

Morning Brief: China's Hebei province, the largest producer of steel, showed a flat growth in the January-February, 2024 period while three of the country's top seven crude steel-producing provinces recorded a y-o-y drop in this period.

Total volumes dipped a marginal 0.4% in these two months to 168 million tonnes (mnt) against 169 mnt seen in the same two months in 2023.

Province-wise break-up

Hebei, the largest crude steel producing region, saw output remaining flat over January-February, 2024 at 36 million tonnes (mnt). Jiangsu, the second-largest producer, saw volumes rising 7% y-o-y to 21 mnt (19 mnt). However, Shangdong (-3%), Liaoning (-8%), and Shanxi (-6%), with a total production of 33 mnt, saw declines. Production at Guanxi and Guangdong rose 17% and 10% respectively but their combined contribution was a nominal 13 mnt.

Factors keeping China's crude steel production flat

Production cuts amid squeezed margins: In fact, Chinese steelmakers' enthusiasm for lifting their hot metal output turned weaker in these two months, as some of their losses deepened, forcing many to idle their blast furnaces (BFs) since mid-February, as per some sources.

In fact, the fall in finished steel prices further squeezed BF mills' profit margins, pressing many of them to rein in production to cut losses.

The BF capacity utilization rate among 247 key Chinese steel producers ended a six-week rising streak to fall to almost 84% over 16-22 February, lower by 0.38 percentage points from the preceding week, with maintenance stoppages and narrow margins both impacting steelmakers' production.

During the same period, the daily hot metal output among these sampled mills also fell 10,400 tonnes/day or 0.46% w-o-w to 2.24 million tonnes per day (mnt/d), while their operational rates averaged 75.63%, down 0.74 percentage point w-o-w.

Lunar holidays slow down demand: The Lunar New Year holidays, which fell over 10-17 February, this year, slowed down demand in China's domestic market. China's automobiles sales in February declined nearly 20% y-o-y to 1.584 million units as per data from the China Association of Automobile Manufacturers (CAAM). Moreover, sales saw decrease of 35% m-o-m against 2.439 million units in January 2024, respectively. But, overall, auto production and sales in January-February 2024, rose 8% and 11% y-o-y.

Despite markets reopening after the Lunar holidays, demand in other sectors also remained sluggish due to the cold weather. Rising inventories and supply-demand imbalance fuelled caution among traders, leading to fragile market sentiments.

Dull demand, raw materials ease prices: Although, China's key economic indicators improved over January-February, 2024, the property sector is still struggling to find its feet despite the stimulus measures offered by the government. This led to a continued decline in Chinese domestic steel prices, further dampening any incentive to increase production.

Chinese billet prices, exw-Tangshan, declined almost 1% to RMB 3,619/t ($500/t) in January 2024 from RMB 3,654/t ($505/t) in December 2023 and by a further 2% to RMB 3,552/t ($491/t) in February 2024. Data from China's National Bureau of Statistics, maintained by BigMint, reveal that both benchmarked HRC and rebar prices in Tangshan dropped 6% y-o-y in January-February 2024. It may be noted prices had upped slightly in the third week of January but had backed down quickly early February onwards.

Raw material prices eased over January-February, also putting downward pressure on prices. For instance, iron ore CFR China fell 7% m-o-m in February.

Outlook

Crude steel production may rebound slightly in the near term as 40-odd blast furnaces were expected to return to production. April, seasonally being conducive to construction, may see a slight recovery in demand. But considering the current weak real estate investment sentiments and constrained infrastructure spending, demand for construction steel may show a m-o-m growth but y-o-y decline and long-term challenges remain. Government policies could offer some support, but a significant turnaround seems unlikely.

Considering these factors, prices may still remain under pressure in the near term.

Meanwhile, it is heard, the National Development and Reform Commission, the Ministry of Industry and Information Technology, and other departments are conducting research and planning on the regulation of crude steel production for the year 2024.