China's steel market puts up mixed performance in CY'23. What lies ahead?

• Production remains almost stable y-o-y in CY'23
  
  
• Poor home demand forces mills to export aggressively
  
  
• Demand likely to rebound in current year amid stimulus measures
  
  

Morning Brief: China's steel market threw up a mixed performance in calendar 2023 (CY'23). While production was stable, consumption slipped marginally. Realty was a no-show although other consuming sectors rebounded. SteelMint goes behind the scene:

Production: China managed to maintain the previous year's crude steel production level in CY'23 with a mere 1% increase to 1.02 billion tonnes (bnt) against 1.01 bnt in 2022 despite no official announcements of emission curbs.

However, December 2023 output fell 11% m-o-m to 67 million tonnes (mnt) against 76 mnt in November 2023. December's decline can be attributed to maintenance and environmental pressures, which also led to the lowest monthly output since 2017. On a daily average basis, output fell to 2.16 mnt in December, down 14.3% m-o-m from 2.54 mnt in November 2023.

The absence of emission caps, combined with demand rebound from sectors like ship-building, solar, and automotive, played a role in stabilizing production. Notably, this stable output followed two consecutive years of decline.

Demand: The range-bound crude steel output was also a function of decline in real estate demand. Steel demand continued to slip at an estimated 1% last year, where real estate steel demand declined 20%.

Since real estate has the highest share in steel consumption, a poor performance here dragged down the overall demand for steel. Real estate and related industries contribute an estimated 30% to China's GDP - about twice the share in the US. Data reveals, real estate development growth dropped almost 10% cumulatively by the end of last year.

Falling property prices and sales squeezed developers' margins. Despite falling property prices, sales by floor space fell a steep 14% in June last year.

A decline in construction demand also led to a dip in cement demand, which fell nearly 1% last year.

Exports rise amid as mills rush to recoup margins: As a natural corollary to the fall in domestic demand, Chinese mills started looking overseas rather aggressively to recover squeezed margins. Consequently, steel exports spurted a considerable 34% to around 91 mnt in CY'23 against 67 mnt in CY'22. But, the exports surge was not a result of any vibrant demand from overseas markets, but rather the reality of excess steel having nowhere to go in China. And, to capture a chunk of the global markets, China reduced its export offers drastically. For instance, in CY'23, benchmark HRC export offers fell to an average $594/t FOB compared to $703/t FOB seen in CY'22.

Domestic prices fall amid dull demand: With steel demand declining, domestic Chinese prices also retreated. HRC and rebar prices fell 11% and 12% respectively. Rebar fell sharper because of the lack of demand from real estate construction. HRCs performed slightly better, supported by improved auto sales and exports.

Energy sector puts up good show: China's coal and power sector remained in the positive zone y-o-y with coal production rising 4% to 4.66 bnt in CY'23 (4.49 bnt in CY'22) and industrial power generation rising 5% to 8.9 trillion kiloWatt hours (8.46 kWh). Thermal power generation rose over 6% to 6232 trillion Watt hour (5,874 tWh) as hydro-power struggled, with output dropping 5.60% last year.

Macro factors' trend mixed: China's GDP rose 5.2% to 126.06 trillion yuan ($17.70 trillion) in CY'23 against 120.14 trillion yuan ($16.83 trillion) in CY'22.

However, Chinese manufacturing weakness can be seen in industrial production growth data which decelerated to 3.7% y-o-y in July 2023, below the consensus forecast of 4.3%. The root of much of this manufacturing slackness can be traced to a slowing global economy. In November, the Purchasing Manager Index (PMI) of China's manufacturing industry was 49.4%, a decrease of 0.1 percentage point from the previous month.

Infrastructure investment remained moderate. From a level of 9.2% growth in January 2023 it fell to its lowest of 5.8% in November last year but recovered to 5.9% in December m-o-m.

Automobile sales, however, showed a steady acceleration. M-o-m, in December, 2023, sales rose 6% to 31,50,000 units against 29,70,000 units in November and almost doubled from 16,40,000 units in January 2023.

Outlook

Chinese steel demand is expected to gradually recover and stabilize in 2024. Steel demand's share from the real estate sector, after two years of decline, is expected to fall below 20% although the decline in new constructions in 2024 is expected to further narrow and the negative drag of real estate on steel will significantly decrease on the back of government stimulus measures.

Government policies will also support infrastructure, manufacturing and consumer goods and shipbuilding etc.