China's Modest Steel Production Cuts: Will They Boost Steel Markets?

China's Steel Industry Trends 2023

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China's daily crude steel production took a step back in mid-October, as Chinese steelmakers faced challenges due to narrow profit margins. However, despite the reduction in output, the absence of government-mandated production cuts prevented any significant boost in steel prices.

As of late October, the Chinese government had refrained from imposing strict limits on steel production for 2023. This led market observers to anticipate that mandatory production cuts might not be in the cards this year. Consequently, any output declines in the fourth quarter were expected to be relatively modest, potentially resulting in total crude steel output for 2023 surpassing 2022 levels.

With abundant steel production but sluggish domestic demand, some industry experts anticipated that Chinese steel prices would remain subdued, while iron ore costs continued to remain high. They cautioned that the pressure on steel profit margins could persist throughout the remainder of 2023.

In the period from October 11 to October 20, China's daily pig iron and crude steel output decreased by 0.5% and 0.7%, respectively, compared to early October, according to data from the China Iron and Steel Association. This brought the daily averages for pig iron and crude steel output from October 1 to October 20 to 2.371 million metric tons and 2.726 million metric tons, down by 0.6% and 0.4% from September's daily averages. However, these figures were still 3.8% and 6% higher than the previous year, based on calculations by S&P Global Commodity Insights using CISA and NBS data.

On October 20, finished steel inventories at steel mills and spot markets monitored by CISA stood at 25.51 million metric tons, which was about 3% lower than the same period in the previous year but still 10% higher than in 2021.

To align China's 2023 crude steel output with 2022 levels for decarbonization goals, daily crude steel production needed to drop to an average of 2.269 million metric tons over November and December, representing a 17% reduction from October, according to calculations by S&P Global. However, some industry sources argued that achieving such a significant reduction in just two months seemed almost impossible, especially considering that economic growth remained a top government priority.

"Steel profit margins are less than ideal, but most steel mills are hesitant to scale back production. Their strategy is to maintain high production levels until other mills are unable to sustain losses and are forced to cut production first," explained one market insider.

Without an expansion in steel output, it was unlikely that Chinese steel prices and profit margins would see improvement, according to some trading experts. They also pointed out that domestic steel demand might continue to be lackluster due to a downturn in the property sector, rising local government debt, and sluggish consumer spending.

On October 24, China announced plans to issue Yuan 1 trillion ($136.7 billion) worth of sovereign bonds to support infrastructure development. However, industry experts expected only a limited short-term boost in steel demand, as a portion of the bonds would be used to repay or replace existing local government debt, while the remainder would primarily fund water conservation projects with relatively low steel demand.

The challenging market conditions had left Chinese rebar producers facing losses of around Yuan 200 per metric ton, while hot-rolled coil producers were hovering around breakeven or slight losses, as per market sources. The combination of high steel production and sluggish domestic demand had kept iron ore import prices elevated but had depressed steel prices for much of 2023, according to S&P Global data. During October 1-25, average Chinese domestic rebar prices were 8% lower year-on-year at Yuan 3,785 per metric ton ($517 per metric ton), while the average IODEX CFR CHINA 62% Fe over the same period was 25% higher at $118 per metric ton.

Source: spglobal