Posted on 21 Jul 2022
After navigating through a rough period during the past two months, China's steel market stands a fair chance of recovering in the second half of this year, given the positive trend for market fundamentals and the macroeconomic environment, Xu Xiangchun, Mysteel's senior analyst, suggested in a recent report.
According to Xu, the COVID-19 situation in China has eased to a large extent, and data recently released by the country's National Bureau of Statistics indicate that the domestic economy has bottomed out, both of which will support steel demand and help it improve.
In terms of supply, steelmakers will continue to cut their output against the backdrop of Beijing's directive for another on-year curtailment in the nation's crude steel production.
"Even if China's total crude steel output in 2022 remains unchanged from 2021, the daily average output during the July-December half would still be 160,000 tonnes/day lower compared with H1," Xu said. "And stricter production cuts will lead to even lower output," he added.
Therefore, Chinese steel prices are likely to rebound with the improvement in the supply-demand balance, and domestic steelmakers may manage to enjoy some profits on sales in coming months.
Xu had attributed the slump of steel prices in H1 mainly to the mismatch between supply and demand.
Domestic steel demand under Mysteel's survey declined by 9% overall on year during January-June. Meanwhile, according to China Iron and Steel Association, daily average output of crude steel in this year's second quarter surged 12.7% from the first quarter, imposing great pressure on steel prices.
In addition to the excess supply, the high prices of raw materials such as coke and coking coal added to the burdens of steelmakers. "Domestic steel prices dropped by 28% on year as of July, but steel mills' production costs only fell by about 20%," Xu said. "Hence, the profit margins of steel mills were squeezed badly."
Nevertheless, Xu believes that this gloomy situation will turn around during this half and conditions will stabilize in future because Chinese steel demand will reach a plateau next decade after having reached the peak.
"Since China's current urbanization rate is about 65%, lagging behind that of developed countries, the national government will press ahead with urban residential construction, which means stable demand from the largest domestic steel consumer – the real estate industry," he explained.
"As for steelmakers, most would rather curtail their production than incite a price war in response to the current feeble demand, as the heavy losses have made them realize that a race to the bottom could only drag the whole industry into the mud," he added.
Moreover, China has implemented a series of policies to contain steel production capacity and curb the blind expansion of steel supply, which should reduce the risk of steelmakers aggressively competing against one another as well.
Therefore, Xu expects that Chinese steelmakers can expect to enjoy healthier profit margins in the second half of the year, and that the steel industry will leave the tough circumstances in the past and usher in high-quality development in the long run.
Source:Mysteel Global
