China shadow on steel sector recovery

Sumit Maitra

Extra production by China in a weak economic scenario coupled with uncertainty driven by the confluence of factors ranging from geopolitics to concerns about global financial markets has put a dark cloud on steel sector recovery.

Steel prices were on a downward trend for most parts of 2022 on account of factors affecting the Chinese market. Slowdown in infrastructure and construction sector in China due to stalled projects and liquidity crunch, leading to higher inventory levels was the primary reason for reduced demand.

The prices then started to recover in 2023 increasing 26 percent from November 2022 to reach $695 per ton in March 2023.

Prices of steel, along with its critical inputs, have again started correcting in the past few weeks.

“Steel prices have reduced over the last few weeks, which has seen China exporting higher steel volumes and the competition has intensified in export markets,” analysts with Motilal Oswal said.

“A lot depends on what is happening in China,” T V Narendran, CEO and MD of Tata Steel has said when asked by analysts about his views on the recent global correction in steel and its input prices.

“While Chinese steel industry ramped up in anticipation of growing demand, they were producing at highest levels, touching 96 million tons (mt) in March and hence, exported 8 mt, which is more than what they have done for a long time. This had a impact on the global sentiment because suddenly, 2 mt hit the global market when the rest of the market was still fragile,” he said.

China produced 261.6 mt of crude steel in the first quarter, a gain of 6.1 percent from a year earlier, according to China Iron and Steel Association.

While Chinese market could absorb some 243.4 mt of crude steel in the first three months of 2023, a gain of just 1.9 percent from a year earlier, China produced 261.6 mt in the period, 6.1 percent higher than the year-ago period.

As a consequence, steel prices are falling faster than the price of raw materials and fuel, squeezing the profit margin of steel producers, Wang Yingsheng, chief economist of the China Iron and Steel Association, said.

“Imports (from China) are elevated in Europe though they are below what they were in the Q1 of 2022,” Genuino Christino, Chief Financial Officer, ArcelorMittal told investors.

“Chinese policy can be summarised as compulsive overproduction. This is not good for China, and it is not good for the world… This is not a free market phenomenon,” commented Sridhar Vembu, noted entrepreneur and founder of Zoho.

China dominates the global crude steel consumption with a 50 percent market share in 2022. The major driving industry is the construction sector which accounts for China’s 55 percent finished steel consumption.

The EU is the world’s second largest consumer of steel, accounting for 8 percent of global consumption in 2022.

Weakness in China

In China, major steel product prices are likely to trend down due to weak demand in the real estate sector and oversupply, says Mysteel Research and Consulting.

“It is estimated that steel demand in the real estate sector decreased by 4.79 percent year-on-year during the January-March period. Demand for steel in the infrastructure sector is expected to weaken marginally indicated by a 0.2 percent decreased in infrastructure investments. In terms of supply, steel mills have begun to reduce production due to sluggish demand for steel products,” Mysteel said in a note.

China, in the long term, will have a depressing impact on the steel sector as it moves from investment-led growth to consumption-led growth.

“After China removed its restrictions in December, there was a burst of optimism and everyone thought that the Chinese economy is going to takeoff and will get reflected in steel prices and everything else including coking coal prices. While its economy is expected to grow by 5 percent, it is shifting more to consumption-led growth which need not be as steel intensive as investment- led growth that China traditionally had,” Narendran added.

The silver lining

Steelmakers see higher domestic realisation in the current quarter on improved expectations about economic activity despite the feeling of gloom.

Tata Steel sees Rs 1,000-1,200 per ton higher steel prices in the first quarter of FY24.

“Market is still looking at some direction. Keeping that it mind, this is what we feel,” Narendran recently told investors.

ArcelorMittal has seen a “solid start” to 2023 in the European market as it believes destocking has ended although restocking is yet to happen in any significant way.

“When we see inventory levels in Europe, US and other geographies we operate in, we actually believe inventory levels are quite low which should then support apparent steel consumption,” Genuino Christino, Group Chief Financial Officer of ArcelorMittal told analysts.