China´s “Chicken Or The Egg” Steel Dilemma
Politically and economically, the first 20 years of this century were a breeze for China. Surging annual GDP figures were accompanied by largely unchallenged geo-political expansion. However, since the pandemic began, the country which makes almost 60% of the world´s steel – and then consumes the bulk of it – has lost some of its mojo. The international steel community is principally concerned about the collapsing Chinese property sector where the lack of domestic demand has forced China´s steelmakers to shift some of their problem onto the world stage. The corporate face of the property malaise is China Evergrande Group which was once the country´s top-selling developer but is now saddled with $300 billion in debt. After being suspended from trading a year and a half ago, shares in Evergrande fell almost 80% on their first day back trading in Hong Kong in late August. The stock has lost 99% of its value in the past three years as Beijing has cracked down on property firms. Earlier in August,
Country Garden, another super-sized Chinese property developer, warned it could see a loss of up to $7.6bn for the first six months of this year. The failings of both firms have sent shock waves through China´s property industry, with many other developers defaulting on their debts and leaving millions of building projects unfinished. Hence the decline in steel demand.
The question for the central Chinese government is: what to do about it? Who to stimulate first, and how? Given that property construction consumes almost 40% of all China´s steel, offering further liquidity and credit support to developers such as Evergrande has its attraction. But less so at a time when National Bureau of Statistics data shows July home sales declining 46% month on month and 24% year on year. (Anyhow, could you really trust Evergrande with the money?). Conversely, if you let Evergrande and Country Garden fall over completely, what have you just done to steel demand? And to the economy as a whole?
An ill wind blowing through the Chinese steel industry bodes well for nobody. Paradoxically though, despite the falling end-user demand, steel production has shown no signs of slowing in China. Platts reports that blast furnace utilization rates reached 92% in August, causing a rise in steel inventories which will have a knock-on effect on steel export prices. Industry sources say rebar inventories rose by 20 – 25% during July in some hubs. Again, the central government finds itself in a quandary. Partly for carbon emission reduction reasons, the government mandated that 2023 steel production levels must be lower than the 2020 level. Yet steel production is one of the pillars of the Chinese economy.
In Europe, the direction of steel pricing has been hampered by the holiday season which has now just ended. MEPS reports that steel producers attempted to raise prices for both flat and long products before the summer shutdowns, with some mills even issuing formal price increase letters to customers. But buyers dismissed the proposals as unworkable and will evaluate price direction as September unfolds. Purchasing activity is therefore likely to remain at a low level for this month.