What factors will drive China's steel market in 2022?

• China's steel production to drop in 2022
  
  
• Scope for downstream steel demand growth is limited
  
  
• Drop in crude steel production to impact raw material demand
  
  
• EAF share expected to rise to 12% in current calendar
  
  
• Exports to possibly reduce this calendar due to demand-supply mismatch
  
  
• Demand for imported ore to drop
  
  

Morning Brief: What factors will drive the Chinese steel market in the current calendar? While crude steel production may obviously dip because of the output cuts and carbon goals, there is limited scope for downstream consumption to increase. How will these two factors impact exports and raw materials in the current calendar? Jing Zhang, analyst in the iron ore department of MySteel China, discussed at length, on the topic "Key Drivers of Chinese Steel Market in 2022", during SteelMint's recent Engage 2.0 webinar series.

Key takeaways:

On crude steel production

There is no official document on the crude steel output reduction yet. However, if the per capital energy consumption, and carbon neutrality policy are considered, probably, China's crude steel output will reduce by 2% this year. If the country's steel consumption remains at 9.85 bnt, the export volumes will actively reduce in this case.

Crude steel production will either remain flat or decrease by 20 mnt compared to last year. However, raw material demand can also be affected by the reduction in crude steel output. According to the Five-Year Plan output increment parameters, in 2022, EAF share is likely to rise to about 12% of China's total crude steel output. In such a scenario, crude steel output will probably reduce in 2022 to 1.02 bnt.

On consumption

China's per capital crude steel consumption is likely to drop. It is difficult to increase the apparent per capita consumption after reaching 500kg (South Korea and Singapore are special cases). From the trend seen in China and the United States, the former's per capita consumption will decline in future.

Steel consumption is likely to remain the same according MySteel's projections. The demand intensity of end-consumption for steel is limited. Among consumer goods, demand for steel is low except for segments where steel demand is obvious for manufacturing - like automobiles, shipbuilding and household appliances. Steel demand from manufacturing is expected to increase in 2022. New ship-building orders were up 86% in 2021.

Automobile steel demand may grow 29% in 2022, domestic appliances by 7%.

On exports

Direct export volumes of steel are expected to decline in 2022 because of the demand-supply gap in the domestic market. However, in indirect exports of steel products, ex-China demand is likely to remain stable. Because, firstly, ex-China GDP growth has been considered and secondly, the supply chain of these countries will remain unclear because of the ongoing Covid pandemic impact. So, indirect export demand is likely to remain firm for China.

China's commodity exports increased y-o-y, most of which were steel consuming products. As a result, a huge amount of steel is exported indirectly.

Most of these exports are to South East Asia and especially in hot rolled coils, because the high HRC export prices offer profit margins. But the export volume may not increase significantly moving forward because margins on semis may not be that much and also considering the carbon emission controls that were forced on the steel mills.

But, overall, steel exports from China could be lower by 10 mnt in 2022.

On raw materials

Raw material demand will be impacted by the decline in crude steel production. If, according to the Five-Year output increment parameters, in 2022 the projected EAF share rises to about 12% of total crude steel output then China's crude steel output will decline to 1.02 bnt. In that case, the peak crude steel output will probably reduce by 40 mnt in 2022. And if the Cornerstone Plan of increasing domestic iron ore supply is considered, domestic concentrate supply will rise by 6 mnt this year. A cautious projection shows China's demand for imported iron ore reducing by 20 mnt in 2022.

And for coking coal and coke, policies will guarantee stable supply from Inner Mongolia, Shanxi and Shaanxi provinces. It is expected that the tight supply scene will slightly alleviate in 2022 and if this happens, prices of coking coal and coke will drop.

Since EAF output may increase this year, scrap consumption in 2022 is likely to reach 221 mnt. According to the prediction of China Scrap Iron and Steel Application Association and MySteel, scrap supply will increase by about 10-15 mnt every year. So, by 2030, the increase in EAF-made share of steel will account for 40-50% of the total crude steel output, which will have a huge impact on the use of iron ore.

The "cornerstone plan" proposes to use 2-3 "Five-Year Plans" to effectively change the composition of China's iron ore supply sources and fundamentally resolve the problem of resource shortage in the iron and steel industry. The goal is to achieve 370 mnt of domestic iron ore supply, 300 mnt of scrap consumption and 220 mnt of beneficial interest mines by 2025. These would mean additional 100 mnt of domestic iron ore, 70 mnt of scrap consumption and 100 mnt of beneficial interests mine compared to 2020.

Based on this goal, China's crude steel output is estimated to be at 1.033 bnt in 2025, where the share of domestic ore and scrap to crude steel output can reach 22% and 27% respectively, both 6 percentage points higher than in 2021.