Posted on 02 Sep 2022
China's steel producers are struggling with the most difficult period they've encountered since the central government's tough supply-side reforms of 2016, due to the slower-than-expected recovery in steel demand and mounting pressure from high production costs, the China Iron and Steel Association (CISA) warned recently. Noting that many steel mills' profit margins recorded substantial falls during this year's first half, the association has conducted a health check of the industry and identified the key points its members will need to focus on.
Chinese mills' profits plunge in H1, while supply-demand imbalance persists
Over January-July, the total gross profits of CISA's 90 key steel-mill members plunged by a substantial 63.4% on year to Yuan 93.6 billion ($13.9 billion), caused mainly by higher raw materials costs and falling steel prices from the depressed steel demand, according to the association. Last year, crude steel output of the 90 steelmakers accounted for 85.5% of the country's total.
China's steel industry faced downward pressure since the second quarter of this year, and by July, 70% of CISA's member mills were operating in deficit, with their total losses reaching Yuan 13.2 billion. For the first seven months of this year, the 34 loss-making steel mills among CISA's members had lost a total of Yuan 17.8 billion.
The higher prices of steelmaking raw materials seriously squeezed the profit margins of domestic steel mills. CISA noted that for this year's H1, the ratio of coal and coke in total hot-metal production costs had increased to 49.4% – from last year's 35.1% and exceeding the 44.4% for iron ore.
For the first seven months of this year, though the average price of imported iron ore declined by 26% on year, that of coking coal surged by 71% during the same period, according to the association.
Besides, with the depressed consumption the imbalance between steel supply and demand has not been corrected, and this has led to the weakness in steel prices.
Over January-July, China's apparent crude steel consumption dropped by 7.1% on year, higher than the on-year decrease of 6.4% in its crude steel output, while steel prices declined by an average of 6.7% on year, CISA's report showed.
With the persistent fall in domestic steel prices and the pressure from shrinking profit margins, many Chinese steelmakers started to curb their production, attempting to correct the imbalance between supply and demand, CISA noted.
For July, China's daily crude steel output averaged 2.63 million tonnes/day, falling by 13.1% on month, which was also much lower compared with the average of 2.84 million t/d for the first seven months of this year, according to the report.
Also, finished steel inventories held by traders had emptied steadily over the prior two months, and as of August 20, the volume was 19.9% lower from the same period last year, according to CISA data. On the other hand, stocks held by Chinese steel mills were still 16% higher on year during the same period.
"Considering the weak demand, the degree to which production is being adjusted is insufficient, and they (steel mills) should be more self-disciplined (in scheduling production), apart from carrying out the (central government's) crude steel reduction task," the association warned.
CISA suggested that domestic steel producers should calibrate their production based on the contracts they had received, and should improve the operational efficiency of the production lines running at their works as an effective means for further reducing their production costs.
Steel-consuming industries recover slowly, but the struggling real estate market weighs on steel demand
China's investment in infrastructure maintained fast growth of 7.4% on year during the first seven months of this year, and the on-year rise for July alone was 9.1%. Such healthy spending on public works projects may boost steel demand in the coming term, CISA suggested.
However, the impact of the larger-than-expected slump in China's property market outweighed the positive boost to steel demand from the infrastructure side, the association pointed out.
For July, investment in China's property sector slipped by 12.3% on year, and the total area of newly-launched property projects - a statistic closely related to consumption of construction steel - plunged by 45.4% on year.
The real estate sector accounts for the largest proportion in China's rebar consumption. Among the total approximately 1 billion tonnes of steel China consumes annually, about 56% is construction steel, and the proportion for rebar is about 25%, according to CISA's report.
Domestic rebar consumption is expected to retreat to 230 million tonnes for the whole year of 2022, as against the 252 million tonnes in the previous year, the association estimated. It was the poor performance of the property market that led domestic output to decline by 14.7% on year over January-July, it noted.
Steel demand in some manufacturing industries is also slowing, the association observed. For example, though the industrial machinery sector maintained growth overall over January-July, the export value of mechanical and electrical products increased by only 10% on year, slower than the growth rate last year. During the same period, output of washing machines and refrigerators decreased somewhat, and that of containers fell sharply.
Steel exports decline with the fall in overseas prices and weaking demand
Over January-July, China exported 40.07 million tonnes of steel products, down 6.9% from the same period last year, as Chinese steel producers were inactive in increasing exports given their uncompetitive prices with the fall in prices globally and shrinking orders from overseas buyers.
For example, as of August 25, China's FOB price of hot-rolled coil was $595/t, higher than the import CFR price of $593/t in Southeast Asia, according to CISA.
With steel demand worldwide being tepid and production costs high, steel producers in many countries and regions slowed their production pace or suspended operation.
Over the first seven months of this year, production in eight of the world's top ten steelmaking countries declined by varying degrees, CISA said, quoting data from World Steel Association.
Mills' good financial status and optimized investment direction lay firm foundation for development
In the past several years, the overall asset status of China's steel industry has significantly improved, thanks to the effects of supply-side reform and the country's rapid economic development. The relatively solid financial foundation steelmakers have built should allow them to cope with the current challenges, CISA argues.
By the end of July, the total assets of CISA's 90 key steelmaker members came in at Yuan 6.1 trillion, while the asset-liability ratio declined by 0.69 percentage point on year to 61.22%.
During this year's January-July period, Chinese steel mills kept their investment in research and development at a high level, with funding for R&D among CISA's 90 members rising by 10.9% on year. For the first half year, the proportion of investment mills allocated to energy conservation and environmental protection reached 30%, as against the 25% last year, and the ratio for process improvement and product-quality improvement increased to 34% from last year's 25%.
China is executing the largest-ever steel capacity upgrading plan undertaken by any steel industry anywhere, CISA says, pointing out that domestic steelmaking and steel-forming technology and equipment is being comprehensively improved. This too should help steelmakers enhance their competitiveness and deal with the current market instability.
Present difficulties should allow mills to complete unfinished projects
CISA's survey showed that as of August, among the 390 million t/y of steelmaking capacity and 340 million t/y of ironmaking capacity earmarked to replace ageing and less efficient capacity, work to install 87 million t/y steelmaking and 89 million t/y ironmaking capacity is ongoing, while construction on another 114 million t/y steelmaking and 93 million t/y ironmaking capacity has yet to start.
The 390 million t/y of new steelmaking capacity will replace 430 million t/y of old capacity, and 340 million t/y ironmaking capacity will replace 380 million t/y of old facilities, according to the report.
In addition, by 2025 China aims to complete the upgrade of 800 million tonnes/year crude steel capacity to achieve 'ultra-low' emission levels during operation. As of August 25, 172 million t/y crude steel capacity had been recognized by CISA as satisfying all the conditions necessary to meet the government's 'ultra-low' emission standards, while another 122 million t/y of crude steel capacity had partially met the standards.
Coupled with those projects in the midst of being reviewed, to date facilities for 400 million t/y of crude steel capacity have met the 'ultra-low' emission standards, with total investment exceeding Yuan 150 billion, CISA observed. This means that to meet the 2025 goal, the upgrading tasks yet to be finished may need an additional investment of at least Yuan 150 billion.
But given the plummeting profit margins in this year's H1, some steel mills may need to adjust their project schedules, CISA admitted, adding that for steelmakers to complete these ongoing projects, the steel firms may need more support and help in the coming term.
Source:Mysteel Global
