On October 20, 2022, workers process seamless steel pipes on a production line in Huai'an, Jiangsu Province, China.
CFOTO | Future Publishing | Getty Images
China's steel industry is struggling as a struggling real estate sector leaves it unable to absorb excess capacity, industry sources told CNBC.
“Chinese demand has been a big disappointment for metals in general,” said Sarvin Chowdhury, head of commodity analysis at BMI, highlighting declines in steel and iron ore in particular.
“This is mainly due to weakness in China's real estate sector, whose weakness is likely to continue for several years and which certainly bodes negatively for industrial metals needed for infrastructure,” she added.
China is the world's largest steel producer, producing more than 1 billion tonnes per year, accounting for more than half of global production.
China is also the world's largest consumer of steel and iron ore, but it remains oversupplied with steel amid weak domestic demand, sending prices of both materials falling.
Prices for rebar in China have fallen more than 20% so far this year to 3,208 yuan ($450) a ton, according to data from financial information firm Wind. Prices for Chinese iron ore, a key raw material for steel, have fallen more than 28% so far this year, according to FactSet data.
“Winter” in the steel industry
Hu Wangming, chairman of state-owned Baowu Iron & Steel, the world's largest steelmaker, recently said the steel industry is in the midst of a “winter” and a long period of adjustment.
Matty Chao, head of Asia Pacific basic materials and oil and gas research at Bank of America, said China's steel industry is “caught in the middle” as weak demand puts increasing pressure on steelmakers' profit margins. He told CNBC he expects the weak demand to continue through 2025 because China's real estate market is “very weak.”
“Chinese exports are having a significant impact on the outlook for steel production in other parts of the world.”
Moreover, hopes that China's beleaguered real estate industry will be able to pull itself out of the slump are fading after no concrete measures were announced at China's much-anticipated third plenary session.
Citi wrote in an August report that excavator sales in China are expected to fall 8% year-on-year in fiscal 2024. Excavator sales are typically seen as a leading indicator of construction activity and, therefore, metals demand.
“Profit margins at Chinese steel mills are at risk of falling to their biggest negative levels this year, which could put further downward pressure on iron ore prices,” said Vivek Dhar of Commonwealth Bank of Australia.
Chinese steelmakers have piled up losses over the past 12 months, leading them to turn to export markets for better prices, Bank of America's Zhao said.
“Unsustainable” market conditions
Several countries have filed dumping cases against China as Chinese producers try to boost exports amid a slowdown in the domestic market.
Thailand recently announced the imposition of anti-dumping duties on hot-rolled steel coils imported from China. India also imposed five-year anti-dumping duties on certain steel sheets imported from China in September last year. Vietnam's Ministry of Industry and Trade has also launched an investigation into some hot-rolled steel products imported from China and India.
“Chinese exports are having a significant impact on the outlook for steel production in the rest of the world,” Citi analysts said.
China's net steel exports in July were 57.1 million tonnes, and if this pace continues for the rest of the year, China's net steel exports in 2024 will rise 17% year-on-year, the Citi team said, adding that rising steel exports in 2023 has reduced steel production room in other parts of the world.
Chile's largest steel mill, Compañía Siderúrgica Huachipato, recently announced it would close its steel operations “indefinitely,” citing the “impossibility of competing with Chinese steel.”
ArcelorMittal, the world's second-largest steelmaker, said Chinese overcapacity had made conditions in the steel market “unsustainable.”
“Excess production relative to Chinese demand has led to very tight domestic steel spreads and a boost to exports,” the Luxembourg-based company said in its second-quarter earnings report.
Bank of America's Zhao said China's steel dumping could lead to an oversupply in export destinations, hitting share prices of domestic steelmakers.
According to Bank of America statistics, five Southeast Asian countries – Vietnam, Thailand, the Philippines, Indonesia and Malaysia – will absorb 26% of China's steel exports in 2023, followed by South Korea with 9%.
