China’s steel mill owners in bad mood as demand hits

Beijing commodities advisor Simon Wu said steel mill owners in parts of China are in a bad mood.

Steel stocks are slowly accumulating in warehouses of the country’s largest steelmaking hub, the northeastern city of Tangshan, as well as in Jiangsu and Shandong provinces, said mill owners Luo, a senior consultant at Wood Mackenzie.

They said steel demand is falling amid pandemic lockdowns and disrupted construction activity.

“There is negative energy everywhere. The steel industry is not making any profit,” Wu said.

There is a lot of steel – a key raw material in manufacturing powerhouse – sitting idle across the country in the midst of a stop-and-go economy driving down demand and prices.

Prices of both steel and its major components of iron ore were volatile during the Shanghai shutdown but headed for a downward trajectory earlier this month.

Weak demand for steel, a driver of China’s economy, also reflected the broader slowdown in the country, although recent data suggested some improvement as industrial production rose slightly by 0.7% in May from a year ago.

Crucially, China’s steel industry – the largest in the world Vast supply chains stretching from Chinese blast furnaces to overseas iron ore mines in Australia and Brazil, host the largest suppliers of iron ore to China.

Because of this, any tension within China could expose a vast network of supply chains, which could add to the pressures of the current global turmoil.

A worker cuts steel pipes near a coal-fired power plant in Zhangjiakou, China, on November 12, 2021. The country’s largest steel consumers and drivers of economic growth — such as property construction and infrastructure development — have been quiet, according to one analyst.

Greg Baker | AFP | Getty Images

According to the China Iron and Steel Association, the national daily production of intermediate steel products such as crude steel and iron ore as well as finished goods rose during May by 1% to 3%. On the other hand, demand decreased, while it was still active.

China’s consumption of crude steel, for example, fell 14% in May compared to last year, said Nikki Wang, head of iron ore for S&P Global Commodity Insights, citing internal analysis.

“The year-on-year decline in steel demand was much greater than the crude steel production. In this case, steel mills are already struggling (with pressure on steel prices),” she said.

That period coincided with the largest citywide epidemic lockdown in China so far in Shanghai.

Thus, inventory levels are 12% higher than last year and could take nearly two months to fall to the average levels of the past five years, assuming steel demand has come back to life, said Richard Low, steel research analyst at CRU Group.

The Chinese market is also competing with the proliferation of cheaper Russian semi-finished steel bars, said Paul Lim, principal Asia analyst for iron and steel raw materials at Fastmarkets Asia.

There were signs of life for domestic steel consumption after China exited lockdowns in early June, but the ‘shutdown’ disruptions caused by a relapse into sporadic shutdowns [have] It was an unwelcome blow to the country’s bona fide economic recovery.

Attila Wednell

Managing Director of Navigate Commodities

With the outbreak in the country, Attila Wednell, managing director of Navigate Commodities, said that calm was the country’s largest steel consumer as well as growth drivers of the Chinese economy such as real estate construction and infrastructure development.

That’s because “there is simply no one to work on the sites,” he added, noting that the industry was surprised by the return of lockdowns.

After the much-anticipated opening of Shanghai in early June after new cases were recorded in both Beijing and Shanghai, China has begun to reimpose some restrictions.

Last week, new data from China’s National Bureau of Statistics showed that real estate investment for the first five months of the year fell 4% from a year earlier, up from 2.7% between January and April.

Home sales by volume declined 34.5% year-over-year in the first five months of 2022.

There were indications of a life for domestic steel consumption after China emerged from lockdowns in early June, but the ‘stop-start’ disruptions caused by a relapse into sporadic lockdowns [have] It was an unwelcome blow to the country’s bona fide economic recovery.”

Melting furnaces can not only be closed

Despite falling steel prices and eroding the profitability of the steel industry, steel mill owners continued to produce, with many of the lower quality iron ore being used to produce smaller volumes.

Analysts said China’s blast furnaces are now operating near full capacity, at more than 90% – the highest rate in 13 months – despite falling profits.

Lu said some factories experienced “largely negative margins” during April and May.

Pricing data shows that prices for popular steel products such as rebar and hot rolled coils used in home construction have fallen by nearly 30% after peaking in May last year after the industrial recovery to stimulate the economy.

Shutting down blast furnaces can be ineffective, as the large reactors used to convert iron ore to liquid solid need to run constantly.

Back slack?

Steel demand and prices fell between 2012 and 2016 after the Chinese economy slowed sharply, causing commodity prices to plummet.

For many miners serving China, such as those in Australia, this was the end of the so-called mining boom.

In 2015 alone, China’s major steel companies incurred losses of over 50 billion yuan.

For starters, this downturn isn’t 2015, Wu said, and steel producers have learned to be resilient against volatility.

“So, they will continue to produce steel because they have to pay wages and keep other cash flows. Perhaps many producers can go on for two years without making money. Many people are abroad. [of China] I don’t understand this flexibility.”

CRU’s Lu said that while some factories are considering slowing production, inventory levels are “a long way from panic levels” and storage capacity is not yet a serious problem.

However, there are early signs that the industry is starting to adapt to these adverse conditions.

newly, There were rumors that the Jiangsu provincial government had tasked local steel mills with cutting production by about 3.32 million tons for the rest of the year.