Posted on 05 Jan 2022
The year 2021 saw the unveiling of China’s 14th Five-Year Plan. It was also the first year of implementation of the country’s dual goals of peak carbon emissions by 2030 and carbon neutrality by 2060. In this year, for the first time, the Ministry of Industry and Information Technology (under whose aegis comes the steel sector) mandated that China’s crude steel output cannot exceed that of CY20, indicating this was necessary to reduce emissions to balance domestic steel supply-demand. The year also saw real estate giant Evergrande collapse under a more than $300 billion debt burden that had a cascading impact on real estate investments and sales.
Dovetailing with the green commitments, last year also saw China focused on the EAF route of steel-making with a massive jump of 2080% in imports of ferrous scrap in Jan-Nov’21. The world’s leading steel producer imported 478,281 tonnes (t) of ferrous scrap in this period as compared to a mere 21,936 t in Jan-Nov’20.
Under the production curb matrix, steel and aluminum sectors were directed to abide by the “capacity swap” policy, whereby new capacity can only be installed if old facilities of equivalent or larger capacity are scrapped, in a bid to control installed capacity across sectors.
CY’21 was marked by China’s coal production crisis which escalated its coal imports.
Production: Preliminary estimates suggest that China’s crude steel output this year could fall by 35-40 mn t compared with CY’21 levels. But, as per a recent post of the Ministry of Industry and Information Technology (MIIT), crude steel output this year will fall below CY20 levels by around 20 mn t. This means, the country’s steelmakers successfully complied with the government’s directive issued in Jan’21.
November showed the way with domestic crude steel output in the first 11 months already -2.4% lower y-o-y at 945 mn t, as per SteelMint data and is expected to end CY21 at 1,013 mn t against 1,059 mn t in CY20, a y-o-y dip of -4.3%.
Demand: In CY21, downstream demand shrunk, and apparent consumption declined y-o-y. From Jan-Nov’21, national apparent consumption of crude steel was 910 mn t, down 5.2% y-o-y.
As per estimates, apparent consumption of steel in CY’21 will be 939 mn t, a y-o-y decrease of 5.7%. Finished steel demand is slated to drop -4.7% to 954 mn t in CY’21, China Metallurgical Industry Planning and Research Institute (MIPRI) says. In fact, demand for steel and its chief raw material, iron ore, are showing a decline for the first time in five years.
Stricter emission norms, tight raw material supply and high energy prices kept demand on a leash, with the Evergrande collapse impacting construction steel demand. Construction industry demand accounts for more than 50% of total steel demand, in which the share of real estate construction is about 35%. According to the National Bureau of Statistics, from Jan-Nov’21, the y-o-y growth rate of funds in place for real estate development declined. The funds in place in Nov’21 fell 7% y-o-y, and by 2.5 percentage points compared to Oct’21.
Prices: The first five months of the year saw bulk commodity prices rising with a recovery in global demand and fiscal stimuli from governments. But, Chinese mills were told to cut production. These factors pushed up China’s steel prices by around 42% compared to the beginning of the year. In CY’21, the average price of the eight major steel products increased significantly compared to the previous year, in which hot-rolled coils saw the largest increase, by 39.4%. The lowest increase was in grade-3 rebar by 33.6%. Prices of other products rose by 34-39% y-o-y.
Chinese steel prices in CY’21
Source: SteelMint Research
Exports: China is likely to end CY’21 with a 21% growth in its finished steel exports, as per SteelMint’s estimates. Volumes, by the end of the current calendar, may touch over 65 mn t, against around 53.67 mn t in CY’20. China, the largest consumer of steel, has exported at an average of 5.2 mn t per month so far in the current calendar.
Export volumes in Jan-Nov’21 touched 61.88 mn t, up 26.75% over 48.82 mn t seen in the corresponding period of the previous calendar.
Although China cancelled the export tax rebates for steel products twice, overseas sales for the whole year saw a five-year decline. China’s net export of steel products in Jan-Nov’21 was at 48.61 mn t, a y-o-y increase of 62%.
China has adopted a policy of moving away from commercial grades exports to value-added, which will allow for lower volumes of production but higher margins, and be in sync with its emissions curbing strategy. At the same time, commercial grades will stay within its shores, to meet domestic, which can reduce import dependency and forex outgo.
Imports: High overseas prices ensured that steel imports remained subdued. Imports over Jan-Nov’21, at 11.05 mn t, dropped 33.35% compared to 16.58 mn t in CY’20. For CY’21, imports are estimated at 12.85 mn t, a sharp 26% fall over 17.35 mn t in CY’20.
Margins: Despite the y-o-y decline in steel production in CY’21, due to the sharp rise in steel prices and the significant increase in profit per tonne of steel, the overall margins of the mills increased significantly. Data shows that in CY’21, the gross profit per tonne for grade 3 rebar and HRCs were RMB 383/t ($60/t) and RMB 536/t ($84/t), respectively, an increase of RMB 139/t ($22/t) and RMB 346/t ($54/t) respectively, a y-o-y increase of 57% and 185%.
According to data from the National Bureau of Statistics, from Jan-Nov’21, the ferrous metal smelting and rolling processing industry achieved operating income of RMB 8843.06 billion ($1,393 billion), a y-o-y increase of 35.3%. Operating costs were at RMB 808.327 billion ($127 bn), a y-o-y increase of 33.4%. Total profit amounted to RMB 415.29 billion ($65.40 bn), a y-o-y increase of 104%.
Inventory In CY’21, the social stock of steel had three characteristics:
1) The overall inventory from Jan-mid-Nov’21 was lower than the level seen in the same period in CY’20, and the inventory peak appeared one week earlier than in the previous year. On 5 Mar’20, the social stock of steel reached a high of 19.747 mn t, a decrease of 3.38 mn t from the high of the previous year.
2) The rate at which destocking happened was slower than in the previous year, especially in plates. In CY’21, the rate of decrease of social steel inventory was 56.9%, a decrease of 10.1 percentage points from the previous year. The decrease rate of building materials inventory was 70%, a drop of 6.4 percentage points from the previous year. The slowing down of flat steel stocks was mainly due to the weakening of demand in H2 and lower production levels.
3) The year-end inventory level was higher than in the same period of the previous year. Since late Nov’21, with the gradual weakening of demand, although the inventory still shows a downward trend, the rate of decline has slowed down further y-o-y, making the overall inventory higher than the same period of the previous year. At the end of Dec’21, the social stock of steel was 8.507 mn t, a y-o-y increase of 11.5%. Among them, the social inventory of building materials was 4.206 mn t, a y-o-y increase of 9%, plates, at 4.301 mn t, a y-o-y increase of 14%.
Outlook
China’s economy is expected to grow 5% in CY’22. With this growth rate and the economy gradually returning to a normal track, what changes will the steel industry face?
This year, the emission curb norms will be further promoted in the steel industry. In Q1 (Jan-Mar’22), the Beijing-Tianjin-Hebei and surrounding areas will implement staggered production. The production cut in the Shanghai region will be no less than 30% compared to the same period of the previous year. Estimates show that during Q1, crude steel output of five provinces and cities will be reduced by 27.95 mn t, with an average monthly reduction of 11.18 mn t, which will obviously impact supply and thus demand not only in the surrounding areas but whole of China.
This will hit iron ore demand. Around 82% of iron ore is imported, but this will reduce by about 29 mn t. Iron ore imports have been calculated on the basis of scrap share of 21% in CY’20.
Output curbs may continue into the year, with crude steel expected to touch around 1.01 bn t in CY22, which would be a marginal dip y-o-y.
Though MIIT has not said the ministry will continue to curtail crude steel output in CY’22, Chinese steel market insiders say that such measures will remain in place this year.
China is facing the “triple pressure” of demand contraction, supply curbs, and weak outlook Therefore, CY’22 policies must be organically combined. Keeping that in mind, infrastructure investment is expected to accelerate in the current calendar. Manufacturing investment will also see rapid recovery but real estate investment growth is expected to bottom out. The property sector may drag down overall steel consumption. Dip in land transactions point to lower construction and investment growth this year.
China’s apparent steel demand will be 927 mn t in CY’22, a y-o-y dip of 1.3%. Crude steel demand may edge down 1.2% y-o-y to around 970 mn t.
China will be impacted by Indonesia’s ban on thermal coal exports in Jan’22. Total coal and coke imports in CY’21 may rise around 7% to 329 mn t against 307 mn t in CY’20. Around 178 mn t of thermal coal was sourced from Indonesia in Jan-Nov’21, as per a report, accounting for 60% of its total imports.
China will be impacted by Indonesia’s ban on thermal coal exports in Jan’22. Total coal and coke imports in CY’21 may rise around 7% to 329 mn t against 307 mn t in CY’20. Around 178 mn t of thermal coal was sourced from Indonesia in Jan-Nov’21, as per a report, accounting for 60% of its total imports.
Source:SteelMint
