China's top crude steel producing provinces see dip in Q1 amid demand, margin squeeze

• Four out of seven key provinces see decline
  
  
• Consumption decline higher than output fall
  
  
• Steeper iron ore prices further dent margins
  
  

Morning Brief: China's crude steel production, after rising 1.6% y-o-y over January-February, 2024, fell back. Volumes dropped slightly by 5 mnt or 2% to 257 million tonnes (mnt) over January-March, 2024 (Q1CY'24) compared to 262 mnt in the same period in 2023.

It made more sense to decrease production as demand remained sluggish despite the policy measures adopted by the government to boost demand.

Province-wise break-up

Hebei province, the largest producer of steel, showed a 2% drop to 55 mnt in January-March, 2024 compared to 56 mnt in the same three months last calendar. Further, of the seven major steel producing provinces, four showed a y-o-y decrease, one remained flat and the balance recorded an increase. Hebei's contribution is more than 50% of the cumulative volume (103 mnt) of the balance six.

Jiangsu, the second-largest producer, however, recorded a 3% increase to 31 mnt (30 mnt). Shangdong followed with a 4% drop to 18 mnt (19 mnt). Liaoning, at 18 mnt, indicated a 10% decline and Shanxi's fell 12% to 15 mnt (17 mnt). Guangxi and Anhui contributed the least with the former up 19% at 11 mnt (9 mnt) while the latter remained flat at 9 mnt.

"Others" contributed 98 mnt, down 2% in the period under review.

Reasons for the decrease in production

Consumption drop higher than production decline: Downstream demand was scant, especially in the post-Spring Festival period. Apparent consumption of crude steel dropped more than the decline in production in Q1. According to data released by the National Bureau of Statistics, while Q1 crude steel production declined nearly 2%, apparent steel consumption was at 232 mnt, a y-o-y decrease of 4.7%. Overall, supply was stronger than demand. This further encouraged mills to keep production down.

Because of low demand, in mid-March, steel inventories of key mills were at nearly 20 mnt, the highest since the beginning of 2024 and also the highest level compared to the same period in the past four years, second only to 21.41 mnt recorded during Covid in 2020. However, as of end-March, the inventories dipped to about 18 mnt, down 5.66% m-o-m and 6.8% y-o-y.

Increased iron ore costs: As per Customs data, China imported around 310 mnt of iron ore in Q1, a y-o-y increase of 5.5%. The average import price was $129.5/tonne, a y-o-y increase of nearly 11% whereas steel prices fell by over 6%. The higher price of iron ore--and therefore increased production costs - eroded the efficiency of the mills.

Prices, margins under pressure amid low demand: The gap between supply and demand was rather prominent, which pressured down prices.

According to CISA, the average China Steel Price Index (CSPI) in Q1 was down by over 6% y-o-y to 109.95 points. The long products index dropped 9% y-o-y in Q1 while the flats index fell 7%. The drop in prices squeezed margins further, discouraging higher crude steel production.

In fact, the decline in mill's revenues was greater than the decline in costs, hampering industry efficiency y-o-y. Data reveals that in Q1, the cumulative operating income of key steel makers was RMB 1.49 trillion ($205.76 billion), a y-o-y decrease of 4.55% whereas the operating costs were at RMB 1.42 trillion ($196.10 billion), a y-o-y decrease of 4%, while the revenue drop was 0.56 percentage points greater than the cost drop. The average profit margin in Q1 was 0.58%, a y-o-y decrease of 0.49 percentage points.

Steel exports rise but offers decrease: Although steel exports rose 28% y-o-y in Q1, the average export price of benchmark hot rolled coils decreased 16% y-o-y to $560/t ($665/t) FOB, as per BigMint data. China has been playing in volumes, capturing large chunks of global markets with cut-throat pricing but at the cost of eroded value which is not boosting mill's bottom-lines.

Outlook

Although the weather has improved with the onset of Q2 (April-June) and is conducive to resuming construction activities, poor availability of funds and unsatisfactory progress of major projects are challenges being faced in the real estate space. Mills, already hit by thinning margins, are unwilling to increase production. Therefore, scope of increasing crude steel output in the near term may be limited.