China Steel Sector’s Malaise Deepens With No Relief in Sight

(Bloomberg) -- There’s more trouble brewing in the world’s biggest steel market.

After a years-long property slump that has crushed the billion-ton Chinese steel industry’s biggest source of demand, prospects are getting no better. Prices are tumbling, profits are dwindling, and there’s little relief on offer from a government focused on retooling China’s economy for the long term.

Beijing hasn’t delivered a big-bang solution for its real estate woes, nor a boom in infrastructure spending that could keep steel consumption on track. As officials talk of boosting consumer spending and high-tech industries, demand for the alloy is poised to contract this year. 

“There’s not many positives for steel and the housing downturn has years to go yet,” said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd. “It’s been clear for a long time that the government views stimulus very differently now.”

The funk in China’s steel market has global implications as iron ore prices languish and China ramps up its steel exports, fueling trade frictions. 

Here are four charts that illustrate the deepening gloom.

Demand Doldrums

The main culprit is the prolonged malaise in China’s property market. Steel demand from construction is poised to shrink by 10% this year, according to Kallanish. That would lower the sector’s share of total consumption to around a quarter — a very low proportion by the standards of the past two decades.

Other areas are still expanding — for example consumer appliances and shipbuilding — but they’re too small to offset the hit from property. Kallanish sees overall domestic demand falling 1% in 2024.

“Steel demand is really poor,” said Wei Ying, an analyst at China Industrial Futures Ltd. “With highly indebted provinces focusing on deleveraging, plus a lack of good projects, infrastructure spending is less than ideal.”

Price Plunge

The slowdown in demand has triggered a price rout in recent months. Rebar used in construction is at its cheapest since 2017, while hot-rolled coil used in cars and home appliances touched its lowest in four years. Many higher-cost producers are making a loss on every ton produced. 

Other more particular factors are weighing on prices. The government is introducing new quality standards for rebar that threaten to make existing inventories harder to ship. That’s triggered some panic selling before the rules go into force in September, according to researcher Mysteel Global.

Export Threat

ArcelorMittal SA, the biggest producer outside China, said “aggressive” exports from the Asian nation are creating problems for the global steel industry, pushing prices in the US and Europe below cost. China’s outbound shipments are running at the highest rate since 2016, and Arcelor’s concerns are shared by governments.

A big increase in flows to Latin America triggered trade pushback there, while anti-dumping cases in Vietnam have attracted recent attention. China’s southwestern neighbor is by far its biggest steel buyer, and import restrictions there could add to downward pressure on China’s domestic prices.

Material Impact

The steel slowdown has had an impact on iron ore prices this year, affecting earnings at mining giants like BHP Group Ltd. and Rio Tinto Group. Futures in Singapore have fallen nearly 30% since the end of 2023, and traded below the key $100-a-ton level on Thursday.

Port inventories of the raw material typically draw toward the middle of the year, but instead they’ve risen every month in 2024 to reach more than 150 million tons. That’ll weigh on iron ore prices, especially with pressure growing for more production cuts at steel mills, including from a government keen to cap emissions.

Some producers have recently cut output sharply, which is helping to balance supply and demand, said Vicky Wei, chief ferrous analyst at Horizon Insights. But looking ahead, it’s hard to see consumption getting support “unless there are new stimulus measures,” she said.

On the Wire

Chilean steel and iron ore producer Cap SA plans to close its mills, saying new tariffs on Chinese products weren’t enough to ensure the profitability of steelmaking in the South American nation. 

China’s overflow of goods abroad is set to change course in the next few years, according to Goldman Sachs analysts, though relief isn’t likely for electric vehicles and steel.

The Biden administration is following the paper trails of some biodiesel producers amid heightened concern the fuels are at times being made with deceptive ingredients that violate federal law.

This Week’s Diary

(All times Beijing unless noted.)

Thursday, Aug. 8:

Friday, Aug. 9:

(Updates iron ore price in ‘Material Impact’ section. An earlier version of the story corrected the currency in second chart)

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