China's steel demand scenario in Jan-Aug'24: Trends and Projections

Horizon Insights: China's steel products' consumption rose marginally by 0.58% y-o-y from January to August, with the weakness in construction activities being partially offset by relatively healthy manufacturing and direct steel exports.

Looking ahead, headwinds may emerge due to a continued contraction in domestic demand for manufactured goods and a decline in indirect exports. In our base case scenario, we have revised down our annual demand forecast to -0.04%, compared to the previous projection of 0.19% growth. This adjustment is largely driven by the faster-than-expected decline in domestic automobile sales, affecting both passenger and commercial vehicle sales.

As we move into the fourth quarter of 2024 (Q4 2024), it will be crucial to monitor: shifts in overseas manufacturing demand and economic changes as the U.S. Federal Reserve lowers interest rates; actual workload from the acceleration of special-purpose bond issuance; and the effectiveness of large-scale equipment and consumer goods upgrades.

In this demand review, we have adjusted our domestic steel consumption forecast downward to -1.07%, from the previous estimate of 0.82%, primarily due to reduced expectations for automobile demand.

A dive into downstream demand:

• Real estate: There is no change to the beleaguered real estate sector with any policy support having a short-lived effect. Even in the first-tier cities, sales started to show signs of gradually falling below the seasonal trajectory. Housing prices are still decreasing in both the primary and secondary markets in August. Apart from being a buyer's market, China's housing inventory overhang problem is a primary factor that is putting a drag on prices.
  
  
• Infrastructure: The main change for the sector is an acceleration in special purpose bond (SPB) issuance since August. However, its pull on construction steel demand is expected to be minimal (at least in the current construction season) due to the lagging correlation between SPB issuance and actual activities. From January to August, Mysteel's cumulative apparent rebar consumption dropped by 19% y-o-y and is expected to remain weak for the rest of the year, with a projected decline of 15% to 18% y-o-y.
  
  
• Manufacturing: The manufacturing sector was the strongest performer in the first half of 2024 (H1 2024), highlighted by record-high flat steel consumption, followed by an apparent decline in August. Construction machinery and machine tools remain the largest steel-consuming categories among the five machinery types we track, accounting for 70% of total steel consumption in the machinery sector so far. Overall steel use in machinery production rose by 15% y-o-y between January and July. Meanwhile, smaller machinery categories such as petrochemical, mining, and agricultural machinery are expected to see over 10% annual growth, with mining and agricultural machinery benefiting from a low base in 2023.
  
  

China steel demand overview

Adding direct steel export demand, total steel demand is expected to decrease by -0.04% y-o-y from our previous growth forecast. Compared to fourth quarter of 2024 (Q4 2024), demand is expected to ease seasonally by -1.7% or 5.62 mnt q-o-q. This is expected to be contributed by the manufacturing sector and direct steel exports.

The number of steel mills making losses has been rising since the real estate sector collapsed in second half of 2021 (H2 2021) and is now inching close to 2016's high to control output.

But there has yet to be an effective elimination of excess capacity with steel mills lowering their capacity utilisation rate since late July to curb supply. In a scenario where the market operates on the long-term logic of overcapacity, a low inventory level can be anticipated due to the continuous squeeze on production margins. Under this assumption, total steel products inventory could decrease at one of the fastest rates in history, potentially reaching 29 Mt by the end of the year. This would imply that production has room to decrease from August's 112 Mt level.

Note: This article has been written in accordance with an article exchange agreement between Horizon insights and BigMint.