China’s steel market to remain balanced as 2020 output reaches 1 bil mt

Steel Mill Workers Foundry Metal Molten Hot

The supply and demand dynamics in China’s steel market look set to remain in balance over the second half of 2020 as its steel capacity expansion has slowed, while downstream infrastructure and construction demand is being aided by looser credit policies. As a result, S&P Global Platts maintains its 2020 forecast that China’s pig iron and crude steel output will increase by around 1.7% and 2%, respectively, year on year.

This will take crude steel output to 1,016 million mt for 2020, up from 996 million mt in 2019, and breaching the 1 billion mt mark for the first time, Platts estimates.

China’s National Bureau of Statistics revised the country’s January-May 2019 pig iron output to 351 million mt from preliminary data of 335 million mt. Based on this trend, Platts expects China’s pig iron output in 2019 to be revised to around 846 million mt from previously reported 809 million mt. Therefore, pig iron output may reach around 860 million mt in 2020.

China’s surging production is largely due to its capacity replacement program. Platts estimates that pig iron and crude steel capacity have reached around 1.026 billion mt/year and 1.227 billion mt/year, respectively, both up by around 4 million mt/year from end-2019.

Net capacity expansion in 2020 has slowed from 2019, when capacity expanded by 23 million mt/year for pig iron and 42 million mt/year for crude steel from 2018.

This is because much of the old capacity replaced in 2019 was idled or closed before 2019, making newly commissioned facilities in 2019 in effect a net capacity expansion. However, most of the replaced facilities in 2020 are still running before the new facilities are commissioned.

Moreover, some projects scheduled for commissioning in H1 have been delayed. These projects have an overall crude steel capacity of 9.6 million mt/year for pig iron and 13 million mt/year for crude steel.

The delay of commissioning is partly due to the COVID-19 pandemic that disrupted construction in early 2020, and partly because some steelmakers deliberately slowed construction or commissioning to avoid hitting the market with too much new capacity coming on stream at the same time, market sources said.

In H2, there will be 61 million mt/year of new pig iron and 83 million mt/year of new crude steel capacity scheduled to be commissioned, including those delayed projects. Though new facilities are premised on replacing old ones, there will still be a net capacity expansion of around 4 million mt/year for pig iron and 9 million mt/year for crude steel this year, Platts estimates.

Most of the new projects are expected to be commissioned in late 2020, and some may be delayed into 2021. Therefore, further capacity expansion in H2 will be limited, contributing little to China’s overall iron and steel production in 2020.
Construction remains the major demand driver

The construction sector will continue supporting steel demand in H2, while significant credit easing has allowed mills and traders to hold on to abnormally high steel inventories.

Driven by supportive fiscal policies, the yearly infrastructure investment growth rate is expected to reach around 10% in 2020, market sources said, up from minus 6.3% over January-May.

As a result, steel demand from infrastructure construction is likely to grow even stronger in H2 than in Q2. Market sources estimated that China’s infrastructure investment increased by about 8% year on year in May, based on NBS data.

The trend in the property sector is less clear for H2. A looser monetary policy will help support the sector, but a reduction in household income, highly leveraged Chinese residents, and Beijing’s determination not to use property as stimulus, will all weigh against property sales and, indirectly, new starts.

However, most market sources believe property new starts will still grow over July-December, though probably well below the 8.5% year on year growth in 2019. The floor space of China’s property new starts returned to positive growth in May, for the first time in 2020, at 2.5% year on year.

One market source said infrastructure alone was unable to absorb all the surplus steel. Weaker property new starts meant China’s steel inventories might stay abnormally high through H2, while China’s easier credit will allow mills and traders to hold on to much more steel inventories, he added.

Platts estimated China’s overall finished and semi-finished steel inventories at end-March had tripled from a year earlier. Despite this, domestic rebar profit margins still ranged between $30-$45/mt in March, according to Platts analysis. The rebar margin improved to around $72/mt mid-June, despite inventories in eastern China sitting at double that of a year ago.

China’s infrastructure-related manufacturing, such as engineering machinery and power generation, is expected to provide strong demand for plate and some flat steel products in H2. But China’s car industry, which is unlikely to walk out of depression in 2020 due to over-consumption, will continue to undermine the flat steel market.

Platts expects China’s steel margins to stay healthy in H2, though it is unlikely they will reach the peaks seen in H1 2019. In tandem with the country’s steel capacity expansion program, China’s steel margins have trended downwards since 2018.
Source: Platts


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