Tepid domestic demand, robust exports to tint China’s steel sector in 2024
China’s debt crisis, a sluggish consumer spending and growing steel overcapacity are expected to remain as the biggest hurdles for the domestic steel markets in 2024, stretching on their woes that have lasted for several months now, but silver lining remains amid robust prospects from the export sector.
In Asia, steelmaking capacity is also seen expanding in Southeast Asia and India, which could lead to more competition for local supplies in respective markets.
In 2023, Chinese steelmakers commissioned about 22 million mt/year of pig iron and 28.5 million mt/year of crude steel capacity, predicated on closures of about 23.8 million mt/year existing pig iron and 29.8 million mt/year existing crude steel capacity, according to S&P Global Commodity Insights calculations based on information gathered from market sources and company announcements.
Newly commissioned facilities are generally more productive than older ones, which indicated the growth of China’s pig iron and crude steel capacity in 2023, market sources said.
Chinese steel markets in 2024 may continue to remain under pressure due to capacity expansion, as steelmakers plan to bring 82.2 million mt/year of pig iron capacity and 114 million mt/year of crude steel capacity facilities on stream, S&P Global calculations showed.
These new facilities will replace existing 90.6 million mt/year pig iron and 108.7 million mt/year crude steel capacity.
China’s crude steel capacity reached at least 1.25 billion mt/year by the end of 2022, and overall demand for Chinese steel could fluctuate around 1 billion-1.05 billion mt in the coming years, before falling further, according to mill and trading sources.
Chinese steelmakers plan to commission 42.5 million mt/year of electric arc furnace steelmaking capacity in total in 2024, according to S&P Global data.
As some of the new EAFs would replace existing converters, the total EAF capacity in China is likely to expand by 21 million mt/year to around 220 million mt/year at the end of 2024, accounting for 17.6% of China’s total crude steel capacity, according to market sources and S&P Global data.
However, it remains questionable whether China could bring the EAF steel output ratio from the current 10% of the total crude steel output to 15% by 2025, due to underdeveloped scrap supply chain, some sources said.
Emerging markets in Asia are also witnessing capacity growth.
There are several new steelmaking facilities coming on stream in Southeast Asia and India, according to company data and sources. This could lead to more competition for local supply in these markets, sources said.
Indonesia and Malaysia are seeing two new blast furnaces ramped up to full capacity in 2024 with a total of annual supply of 4 million mt of HRC.
While expansion plans are ambitious in Asia, it might take some more time for the capacity to be realized.
“[I]t’s hard to say whether these projects, especially in [Southeast Asia], can come on stream on time. Most of the projects are subject to some delay due to the impact of COVID and weaker steel price environment,” according to S&P Global analysts.
“New ones are being announced but there seems little progress at many of the projects that were announced before the pandemic. We feel the regional steel market environment is not as attractive as it was around 2016-2018 when many of these projects were announced,” the analysts said.
China’s output controls
Government-mandated steel output cuts in the country are unlikely to be strict in 2024, and the annual steel output may increase further, market sources said.
Ensuring decent economic growth will still be the government’s top priority for 2024, they added.
China imposed steel output cut orders in 2021 and 2022 as part of efforts to meet broader decarbonization goals. But the output cut orders have remained absent in 2023, given the pressure from slower economic growth.
With all the newly commissioned iron and steel making facilities from 2018 to 2024, steelmakers need to keep their production high to protect market shares in a weak market, and to lower production cost and generate cash flows, some sources said.
Over 2018-2023, China commissioned about 242 million mt/year of brand-new crude steel capacity, S&P Global data showed.
Due to overcapacity and industry fragmentation, China’s steel output cuts always tend to be too slow when mills are operating at losses, while an output rebound during peak seasons typically remained too sharp compared with demand recovery, some market sources added.
Strong exports likely to sustain
Amid elevated steel production but sluggish domestic demand, China’s finished steel exports are likely to come close or even breach the 90 million mt mark in 2023, reaching a high not seen since 2016, market sources told S&P Global.
They expected strong steel exports to continue in 2024, as exports would still be an important outlet for Chinese steel products, amid overcapacity in China and limited local demand improvement.
Meanwhile, the Word Steel Association estimated that global steel demand would likely maintain the growth momentum of 2023, with an estimated further increase of 1.9% to 1.849 billion mt for 2024. Particularly, emerging economies in Asia are expected to be resilient in demand growth.
With Chinese materials being price competitive, growing steel demand would serve strong basis for Chinese exports. Some trading sources expected steel offtakes from the Middle East, Southeast Asia, Latin America, Africa, South Asia and the CIS to remain healthy in 2024.
Exports in 2024 would remain at elevated levels, if not exceeding those of 2023, some sources said.
China’s pain points
More aggressive fiscal support is needed to directly inject liquidity into the property sector and also boost household income, which could help resolve the property sector’s crisis, some mill and trading sources said.
China’s annual economic conference held in December implied any fiscal and monetary measures taken in 2024 were unlikely to be more aggressive than in 2023, and thus set a weak tone for the steel market.
China’s property sector accounts for about 25%-30% of the country’s GDP and 30% of the total domestic steel consumption.
“It seems property new home construction starts [the biggest steel demand driver in China] and its steel demand will continue falling in 2024… Unless the property sector stabilizes from its debt woes, the consumer spending is unlikely to improve either, which means it’s impossible to see much further growth in manufacturing of consumer-related products, such as cars and home appliances, in 2024,” one mill source said.
China’s infrastructure investment is likely to gain further traction from fiscal support in 2024.
But as China is set to focus on scientific and technological innovation, new infrastructure projects, such as 5G networks are likely to gain the most policy support, sources said, adding that such sectors typically consume less steel than traditional sectors.
Most of the market participants that S&P Global spoke to expected China’s overall domestic steel demand in 2024 to be similar to 2023 levels, or trend downward modestly.