Has steel demand in China peaked?
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- Steel industry sees demand crests & troughs in 2 decades
- Declining realty, aging population denting demand
- Emerging sectors to whip up consumption; will it be enough?
Morning Brief: China has always been watched intently by global economies because of its humongous supply-demand dynamics. A study of the last 20 years reveals, China's GDP peaked around 2007 when crude steel production also hovered at the psychological 500-million-tonne mark.
Crude steel capacity has increased incessantly till 2020 although the GDP dipped and has shown a somewhat erratic graph till date, possibly because of massive credit expansion and local government-level debt burdens.
Steel industry sees several crests and trough in last 20 years
Interestingly, data reveals, steel demand in the dragon country witnessed several crests and troughs in the last two decades with demand peaking only twice in this period, first, around 2008 and the second time, in the aftermath of Covid, but both for different reasons.
Demand peaks around 2008, production escalates: China's infrastructure and property sectors started booming from 2002 onwards, with steel output increasing in tandem. For instance, crude steel output rose in leaps and bounds from 182 million tonnes (mnt) in 2002 to 500 mnt in 2008, an increase of over 300 mnt over a mere six years!
In 2005, domestic crude steel output jumped 28% y-o-y. Total steel output crossed 400 mnt in 2006 - when the 11th Five-year Plan (2006-2010) was unveiled. At this juncture, China's crude steel production accounted for 34% of the worlds' total output of that year -- a milestone in global steel history.
Chinese steel prices also peaked around 2008.
Eurozone crisis, and Chinese overcapacity: But, thereafter, demand and prices both started declining from 2009. The Eurozone debt crisis erupted. Several Eurozone members like Greece, Portugal, Ireland, Spain etc were unable to repay or refinance their government debt or bail out over-indebted banks without the assistance of other Eurozone countries, the European Central Bank or the International Monetary Fund (IMF).
In China, around this time, its steel industry saw some serious overcapacity, with supply exceeding demand. Since the global environment was not conducive to exports, China started experiencing a fall in both prices and demand with the index touching its nadir around 2016.
Measures to curb capacity, lift demand: The Chinese government soon swung in to address the excess capacity. In February 2016, the State Council issued supply-side structural reforms. The measures paid off. Demand scratchily edged up to moderately high levels if compared to the 2008 peak. Prices surged 130% in this period till around 2018.
Trade conflicts, Covid challenges: Trade conflicts with the United States came into play thereafter. Since March 2018, the US imposed tariffs on steel and aluminium products from multiple WTO members, including China, over "security concerns". The move caused widespread dissatisfaction and led China to the World Trade Organisation for dispute settlement.
Soon after, in early 2019, Covid struck. Came lockdowns. Demand started nose-diving while prices dropped 21% over 2018-2020.
The second peak: Late 2020 onwards, the Chinese government again swung into action with booster shots to revive the economy. The market recovered from the pandemic. Goals of carbon peaking in 2030 and net zero by 2060 were announced with plans to swap existing polluting capacities with new-age steel-making. Controls were announced on the amount and intensity of energy consumption.
Demand again rose, around 2021, to 2008 levels. Prices too reached a short-lived peak, rising a sharp 83% over 2020-21.
Yet another trough: But they soon started tracking a volatile, southern path. Complex geo-politics, and a global economic downturn made matters worse.
At present, China is fighting a bloated capacity of 1,065 mnt with stringent curbs and an aggressive export policy in the face of declined domestic demand.
Has demand peaked?
Realty bites, as property demand slows: The property market, which contributed an extraordinarily high 300% to China's GDP, started declining, dragging down domestic steel demand with it. The fall of developer giants like Evergrande and Country Garden were a fallout of a declining realty sector -- an offshoot of a slowing urbanisation and declining demographics. The IMF, in October, downgraded China's 2023 and 2024 growth forecasts, saying its recovery was "losing steam", citing property sector weakness.
Aging population to depress steel demand: Rapid economic growth had so far been propelled by a rising younger population with heightened consumer needs. But, data reveals, China's 60-plus population is increasing from 2020. The change in the population structure will suppress steel demand in the medium to long term. As per China's Population & Development Research Centre, the population will experience zero and negative growth during the 14th Five-Year Plan and in the medium-long term remain at around 1.4 billion till 2035.
Automotive accelerates but cannot match realty: Automotive demand pressed on the accelerator. From 2.07 million units (MU) in September 2021, it raced up to 2.80 MU in October 2023. Over January-October, 2023, sales sped up 9% y-o-y to almost 24 MU.
As the thrust on electrical vehicles increases globally, China's indirect exports will rise and automotive's enhanced role will emerge among steel downstream sectors. However, the steel intensity in automotive is far lesser compared to property's, which accounts for one-third of China's steel demand.
Energy transition to drive demand: Since China has been the highest carbon emitter, the pressure is that much more. As renewables gain momentum, steel demand will also rise. But, energy too may fail to match realty's consumption volume. For instance, solar panels, windmills or even pipelines will cater to a large slice of the population at one go but decrease per capita steel consumption.
Outlook
How will steel demand in China pan out over the medium-to-long term? Is the industry heading for a trough again? On one hand, domestic demand from traditional sources seems to have peaked. In an environmentally changed world order, greener manufacturing methods will open up newer demand avenues. But will these compensate for a traditional steel-guzzling sector like real estate?
Steel conference update: Keeping above factors in mind, SteelMint, along with the Steel Users Federation of India, will be organizing the two-day, Indian Steel and Metal Conference: Supply Chain & Sourcing Strategies, over 10-11 January, 2024 in Mumbai. This is the only conference focusing on steel end-user industries and their issues. It will be followed by the SUFI Steel Awards, 2023. Register fast to avail of special offers.
