Covid hits crude steel production in China's 7 key provinces

• Country ends 2022 with over 2% drop in output
  
  
• Pandemic hits scrap generation, imports may dip this year
  
  
• Production may fall further in CY23 but consumption seen inching up
  
  

Morning Brief: China's top seven crude steel-making provinces showed a marginal -1% y-o-y drop in production over January-November, 2022, as per data maintained with SteelMint. The volume in the first 11 months of 2022 dropped to 935 million tonnes (mnt) from 948 mnt in January-November, 2021.

Amongst the seven provinces, Hebei was the largest producer at 196.20 mnt. However, production volume dropped -4% in the period under review from 204 mnt seen in the corresponding period last year (CPLY). Hebei also experienced the highest drop amongst the provinces.

The second-highest drop of -3% was seen in Shanxi at 60 mnt against 62 mnt seen in CPLY, followed by Shandong, where output dropped by -2% to 68.60 mnt, from 70 mnt in CPLY.

Jiangsu's production dipped by -1% to 108 mnt against 109 mnt in CPLY. Jiangsu, which houses numerous electric arc furnaces (EAFs), is the second-largest province in China, and contributes over 10% of the country's total crude steel production.

What led to lower crude steel output?

• Covid surge, poor realty performance hit demand: The country ended 2022 with an overall -2.34% drop in crude steel production to 1,006.92 million tonnes (mnt) against 1,031.05 mnt in 2021. This was mainly due to lower demand on account of the poor performance of the real estate sector and the unprecedented Covid surge which had again led to severe lockdowns.
  
  

China's steel imports were also down 26% to 10.6 mnt last year against over 14 mnt seen in 2021, corroborating that lower demand reigned last year. Steel exports remained largely stable at around 67 mnt belying expectations that these would drop by 5-6 mnt. This also proved that lesser home demand led mills to retain their exports at 2021 levels.

• Production decline rate slows
  
  

However, it may be noted that the rate of decline in crude steel production from these seven key provinces has slowed. For instance, the drop was -6% over January-August, 2022. It slowed to -3% in January-September and to-2% over January-October and further by 1% over January-November, 2022.

This is possibly because 2021 saw strict capacity control and these key provinces were trying to reach the guided target even up to the year end. In 2022, in the first quarter, output had already declined significantly due to poor market conditions. So, in the latter half of the year, pressure on output control was not as severe as last year, SteelMint understands.

Interestingly China's iron ore imports remained stable last year, denoting that steel produced through the blast furnace route is sustaining compared to that through the electric furnace route. With energy costs up, electric furnace steel-makers are experiencing squeezed margins.

Scrap supply to be under pressure

In 2023, SteelMint understands, China's scrap consumption will be lower compared to last year largely because the country was under Covid lockdowns and scrap generation was consequently impacted.

Since the opening up of ferrous scrap imports since 2021, China imported a total of 1.05 mnt of the material, of which 0.55 mnt was imported in 2021 and 0.5 mnt in January-November, 2022, down 5% y-o-y.

It is expected that 0.55 mnt will be imported in 2022 - flat y-o-y. The key source countries over January-November, 2022 were Japan and the UK, accounting for 64% and 19% respectively. With the continual push for imports, a few cargoes from the EU and Southeast Asia also entered China.

Looking at 2023, scrap imports may hardly reach 1 mnt due to following reasons: One, long-term overseas prices may remain high. Secondly, China's geological disadvantage - it is located far from exporting countries and is surrounded by scrap importing countries. Thirdly, most countries are tightening ferrous exports keeping in focus environmental and energy consumption concerns. Lastly, China maintains high standards for scrap imports especially since its own iron ore is of poor quality.

Outlook

China may face a decline in real estate steel demand but infra investment and manufacturing will stay supported and possibly allow steel consumption to inch up a marginal 0.15% in 2023.

But output in 2023 may decrease by nearly 10 mnt to 1.013 billion tonnes vis-a-vis 2022. The decline will be mainly contributed by the blast furnace players as such capacities increasingly get replaced by greener options.