Posted on 20 Sep 2022
China’s steel sector continues to face challenges from weaker than expected demand from the property sector, further complicated by Covid-19 pandemic-related restrictions that continue to disrupt construction activity. However, Fitch Ratings does not expect further deterioration in sector profitability following production cuts in response to the weak demand, while high raw material prices should support average selling prices (ASPs), albeit at low levels.
We expect the full-year performance of leading Chinese steel makers, including Baoshan Iron & Steel Co. Ltd. (Baosteel, A/Positive) and HBIS Group Co., Ltd. (BBB+/Stable), to be similar to 2019 and 2020 on an EBITDA level, but much lower than that of 2021.
Steel consumption, measured by total production less net exports, was down by 6% yoy to around 570 million tonnes in 7M22. This was caused by weak downstream demand, particularly from the property sector, coupled with the traditional summer off-season for construction. High raw material prices for coal, coke and iron ore further added to sector-wide losses and lead to voluntary production cuts, with crude steel production plunging by more than 10% month-on-month in July. The lower production allowed profitability to recover in August, albeit at lower levels. We expect production to recover from September as construction enters peak season.
We do not expect a strong recovery in steel demand, despite a 9.1% yoy rise in infrastructure investment during July, to offset the challenges posed by the weak property sector, with gross floor area (GFA) new starts growth sinking by 36.1% yoy and GFA completions growth dropping by 22.7% yoy in 7M22. Steel demand is also suffering from slowing manufacturing growth, which eased to 9.9% yoy in 7M22, from 10.4% yoy in 6M22. The slowdown was triggered by falling exports due to fears of a global recession and subdued domestic demand amid Covid-19 flare ups.
The pandemic-related lockdowns in various cities may stifle the resumption of construction activity nationwide, posing risks to a recovery in steel demand for the full year. However, we do not expect significant downside risk for steel ASPs, as persistently high raw-material prices are stifling profitability any further deterioration in ASPs without a corresponding correction in raw-material prices would be likely to result in more production cuts, as seen in July. This would support ASPs.
We expect steel companies with a strong product mix and limited exposure to construction to outperform peers. Baosteel’s revenue, for example, amounted to CNY184 billion (+0.2% yoy) in 1H22, while its profit before tax reached CNY10.8 billion, although this was still down by 47.1% over the half year. This compares against an industry average of negative 3.6% and negative 68.7%, respectively. Baosteel’s superior performance was driven by the over 80% of sheet products in its portfolio and its strong market position in China’s auto sector, which has been supported by strong government stimulus.
Meanwhile, HBIS recorded revenue before tax of CNY200 billion in 1H22, which was down by 1.9%, and profit before tax of CNY2.8 billion, down by 39.5%. The company’s above-industry performance was supported by its over 50% product mix in value-added steel products and above-average cost position due to its large scale.
Source:Fitch Ratings
