China's steel demand trends shifting. Know why?

• Machinery, infra make inroads, construction falls
  
  
• Demographic changes impact consumption pattern
  
  
• Green transition to play key role in mid-to-long term
  
  

Morning Brief: China has seen a phenomenal 50% growth in crude steel demand over 2010-2023. Currently, it manufactures more than half the world's total steel output. Of the 1,888.2 million tonnes (mnt) produced in 2023, China's share was a colossal 1,019.1 mnt, as per worldsteel data.

However, trends reveal a changing consumption pattern. As per data, not only has demand grown 50% in more than a decade but has sharply shifted away from construction to machinery and, to some extent, infrastructure. Construction which led the downstream demand charts in 2010 with 42% share in 2010, had fallen quite sharply to 24% by 2023 as construction companies procured 37 mnt less steel in 2023 compared to 2010.

Steel demand share of the machinery sector, on the other hand, witnessed a sharp growth from 20% in 2010 to 30% by last year.

Infrastructure saw its steel demand rising from 13% to 17% within this time frame.

Interestingly, the transport sector, whose demand was the fourth-largest with 12% share in 2010, fell to 9%.

Factors influencing shifting steel demand pattern

Collapse of real estate sector: The ongoing property sector collapse was triggered by the 2021 default of the Evergrande Group, the largest real estate player globally. Evergrande and other property sector giants went belly up under the pressure of excess inventory and new Chinese regulations on their debt limits. Eventually, as per reports, an estimated 133 home developers filed for bankruptcy in 2023 amid China's ongoing economic crisis but this was the lowest number as a significant 408 had done the same in 2020, around 343 in 2021 and 308 in 2022. Consumer confidence nosedived and inventory overhang gained ground, leading to an eventual meltdown in the sector. Despite government booster shots, the sector is still struggling.

Machinery sector rides exports demand: On the other hand, the machinery sector received a fillip in this period concerned through a series of equipment renewals. That apart, China's indirect steel exports have shown a healthy growth trend, especially over the last three years, and are likely to end calendar 2024 with a 9% increase to around 127 mnt. Interestingly, over 50% of China's exported merchandise comprise machinery, components and other items related to steel. China exports around $3.5 trillion of goods annually. In 2022, this rose to $3.73 trillion, boosted by the post-Covid pent-up demand and also because the Russia-Ukraine war resulted in abnormally high energy prices in Europe which increased the cost of manufacturing here and diverted end-users towards procuring from China. Surging automotive exports and China's emergence as a ship-building hub are factors that have also supported increased steel demand from the machinery sector.

Infrastructure investment continues but at slower pace: Infrastructure spending had a huge role to play in China's meteoric rise over the past few decades. China built thousands of miles of railway tracks, state-of-the-art bridges, flyovers, roads, ports, airports, etc, which not only generated employment but also improved the quality of life for the citizens. However, although overall investment in infra continued, the pace of growth slowed down, especially in the last few years. Data available with BigMint reveals that infra investment growth slowed from an average 8.55% in July-December 2022 (or H2CY'22) to 8.36% in January-June, 2023 (H1CY'23) and further to 6.16% in July-December 2023 (H2CY'23). The growth over January-June, 2024 (H1CY'24) averaged an even slower 6%.

China attempted to fund infra spending through special purpose bonds, especially towards the latter part of the decade, particularly in the post-Covid period, to kick-start the economy.

Transportation rides EV growth: Even though demand for steel from the transportation sector fell 3% in the time-frame being reviewed, there was an uptick in the amount of steel used by the industry. It rose from around 73 mnt in 2010 to 82 mnt 13 years later. As per data, China's automotive (passenger and commercial vehicles) production peaked from 18-19 million units (MU) over 2010-12 to 29 MU in 2018. But fell to 25-26 MU over 2019-2021 and again rose slightly in 2022 to over 27 MU.

But, with more than half of all new electric vehicles (EVs) sold worldwide being made in China, the sector could receive support if EVs continue to gain in popularity.

Changing demographics: Another factor that is changing demand patterns is China's negative and aging population growth. As per data from the China Population & Development Research Centre, "the Chinese population will experience zero and negative growth during the 14th Five-Year Plan and in the mid-long term, and it will stay at around 1.14 billion until 2035".

It may be noted that China's rapid economic growth in the past four decades has largely benefited from the demographic dividend. The change in the population structure will suppress domestic steel demand in the medium to long term.

Data available from government sources with BigMint from 2020 reveals a steady rise in the 60-plus age group. Aging population would require lesser housing or consumer goods compared to a younger generation.

Outlook

As the energy transition progresses, further shifts in industry demand patterns are likely, especially with the increasing focus on clean technologies, such as EVs. China is doing so with its focus on carbon capture, utilisation, and storage technologies, employing green hydrogen metallurgy, and introducing electric furnaces.

On the other hand, the government is also trying to revive the property sector with various policy props. But still the International Monetary Fund, while raising China's economic growth outlook in May 2024, said additional policies are required to support its struggling housing market.