China's steel exports, iron ore imports up in H1CY'24. How will H2 unfold?

• Lower domestic output, higher power demand boost coal imports
  
  
• Iron ore imports modest amid crude steel production dips
  
  
• Demand seen improving in H2, prices may touch 2023 levels
  
  

Morning Brief: China's steel exports, and iron ore and coal imports all showed a positive trend in the first half (January-June) of calendar 2024 (H1CY'24), reveals data from the General Administration of Customs.

Steel exports, a key component of the Chinese steel industry, showed a 24% y-o-y increase in this period to around 53 million tonnes (mnt) against 43 mnt seen in the same period in 2023. June volumes, however, were down 9% m-o-m.

After slowing down over January-May, the exports growth momentum again picked up slightly over January-June. Volumes still remained significant because, real estate, which consumers 60% of steel demand, still has not recovered substantially. Over January-May, real estate development investment fell and new housing construction area fell 10% and 24% respectively. New commercial housing sales area dropped 20%, and sales by 28%. However, in a nascent uptrend, demand in some cities has picked up.

Manufacturing investment growth, meanwhile, looked up over January-May at 8.6% compared to a lower 6.12% in the same period in 2023. Thus, with a slight recovery in domestic demand, exports have fallen off the 30% levels seen till March.

Indirect steel exports have been showing a healthy growth trend and are likely to end 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. Exports of automotive, ship-building and energy transition products have shown a healthy trend, driven by competitive pricing and upsurge in production capacities. Indirect exports received a boost as global manufacturing has taken a hit due to elevated energy tariffs, especially in Europe.

Iron ore imports up amid crude steel output dips: Imports of iron ore showed a 6% y-o-y increase in H1 to 611 mnt (575 mnt). Import volumes remained modest because crude steel production fell m-o-m by 7.8% in March and 7.2% in April although it recovered by less than 3% in May. But, overall, production fell 1.4% over January-May while June data is awaited.

Coal and lignite imports: Coal and lignite imports rose around 12% y-o-y in H1CY'24 to 250 mnt (222 mnt) amid lower domestic production and an upsurge in power demand. Official data showed China's power consumption was 11% higher in January and February this year compared to the same months in 2023. China's electricity demand is being boosted by factors like increasing electrification of vehicle fleet and industrial processes -- such as some types of smelting -- and higher consumer electronics demand.

H2 outlook

While demand is expected to improve in the second half (H2) of the year, production may also tend to decline. Recently, the State Council, the National Development and Reform Commission and other ministries, as well as Fujian and Tangshan, have issued a series of documents, enunciating that the time for strong production constraints has arrived. In 2020, China had clearly proposed the twin goals of "carbon peak" in 2030 and "carbon neutrality" in 2060. Till 2022-23, due to the impact of Covid, carbon reduction targets were not achieved. However, now, the run-up to these goals is getting shorter, and the pressure to decarbonise is mounting, and so is the urgency to reduce production.

In recent years, the country has developed new energy sources in order to change the energy mix to prepare for carbon peaking and neutrality. In H1, the daily crude steel output was more than 2.9 mnt. If output this year is required to remain at last year's level, then daily crude steel output level in the second half of the year will need to be below 2.7 mnt, and monthly output must drop by 9 mnt.

If the crude steel output is required to be lower than last year's level, then the daily and monthly outputs need to drop further. The NDRC document points out that currently 15% of the country's production does not meet basic emission norms. Thus, a new round of reductions will be needed.

From the perspective of steel prices, two scenarios may emerge in H2. One, if demand in this period remains normal, restrictions may be relatively mild, and crude steel output can remain equal to last year's level. In such a scenario, prices will return to levels seen in the second half of last year. HRC prices may hover at around RMB 4,000/tonne.

Two, if demand is higher than normal, on the back of stimulus measures, which can boost infrastructure investment, the production restrictions will be strict in H2. Under such circumstances, prices in H2 may return to the average levels seen in H1CY'23. HRC prices may touch RMB 4,300/t.

Overall, many feel, in 2025, demand will become more stable. The market volatility witnessed in the past two years will subside.