Analysis of China’s Domestic Steel Industry in 2024

Brief

In 2023, downstream steel demand further diverged in China. Dragged down by the continued decline in real estate investment, the weak trend of the demand side of the steel industry continues, but the supply side has changed little. The imbalance between supply and demand has caused steel prices to fluctuate downwards. At the same time, although raw material and fuel prices have fallen, they are still at historically high levels, and the profitability of the steel industry has further declined in China.

Operation Status of Steel Industry in China

The steel industry is an important basic raw material industry with typical strong cyclical attributes. The supply of the steel industry is greatly affected by downstream demand and industry policies. From 2021 to 2023, China's crude steel output was 1.033 billion tons, 1.013 billion tons and 1.019 billion tons, showing a fluctuating downward trend. In the first quarter of 2024, China's crude steel output fell slightly by 1.9% year-on-year due to factors such as insufficient downstream effective demand and delayed demand start-up after the Spring Festival.
In the first quarter of 2023, China's macroeconomic is expected to recover, and steel prices are on the rise; in the second quarter, steel prices show a "V" trend, and the domestic economic recovery is less than expected and the liquidity crisis caused by overseas bank thunderstorms has led to steel prices going down continuously. 

In June, downstream demand was released in stages, and steel prices rebounded in a restorative manner; from July to November, the area of newly started real estate construction decreased, steel supply and demand were in a weak balance, and the overall price fluctuated within a narrow range; in November, with the release of favorable policies such as real estate, market sentiment was boosted and steel prices increased slightly. The average comprehensive steel price index for the whole year of 2023 is 111.86 points, a year-on-year decrease of 11.50 points. In the first quarter of 2024, market demand was sluggish and steel prices continued to fall.

From the perspective of operating performance, according to data from the China Iron and Steel Industry Association, the total profits of key statistical member steel companies were 352.4 billion yuan, 98.2 billion yuan, and 85.5 billion yuan respectively from 2021 to 2023. Although raw material and fuel prices declined in 2023, the cost decline was not as much as the decline in steel prices, and the profits of the steel industry continued to be compressed.

Upstream and Downstream Conditions

Iron ore prices and coke prices have fluctuated downwards since 2023, affected by the relationship between supply and demand. However, the overall price of raw material and fuels is still at a historically high level, and steel companies are still facing greater cost pressure. During the same period, the downstream demand for steel has diverged. Affected by the continued decline in real estate investment, the demand for steel in the construction industry dropped significantly. At the same time, industries such as automobiles, home appliances, and ships are growing rapidly, providing certain support for the demand for steel in the manufacturing industry.

The ferrous metal industry chain includes many industries from top to bottom. As the midstream industry in the industry chain, the steel industry has a strong correlation with the upstream and downstream industries. Changes in the prices of upstream raw material and fuels such as iron ore and coke directly affect the cost situation of the industry. Changes in demand in downstream industries such as real estate, infrastructure, machinery, automobiles and home appliances will also have a direct impact on the prosperity of the steel industry.

(1) Iron Ore

Iron ore is the most important raw material in the steel production process. The iron ore used by Chinese steel companies is mainly imported. The dependence on foreign iron ore exceeds 80%. There is a serious mismatch between steel production capacity and its own iron ore production capacity. According to statistics from the General Administration of Customs, China's iron ore imports from 2021 to 2023 were 1.124 billion tons, 1.107 billion tons, and 1.179 billion tons respectively. 75% of the world's high-grade iron ore production and trade volume is concentrated in the hands of four major international mining giants: Vale, Rio Tinto, BHP Billiton, and Fortescue Metals Group. The high degree of resource monopoly has caused greater cost pressure on steel companies with low iron ore self-sufficiency rates. The average annual iron ore price index is US$120.16/ton and US$119.75/ton in 2022 and 2023 respectively. In the first quarter of 2024, global iron ore shipments continued to grow, coupled with a slight decline in domestic crude steel production, the iron ore price index fell back compared to the end of 2023.

(2) Coke

Coke is the basic raw material and fuel for steel production, and its supply mainly comes from Chinese coal companies. From January to October 2021, coke prices rose sharply driven by tight supply and demand as well as rising coking coal prices; In November, affected by factors such as the contraction of the demand side, the price limit of the coal supply at the policy side and the expanding volume of imported coal, the tight situation of supply and demand of coking coal has been eased, and its price has fallen rapidly. Coke prices were relatively stable in the first quarter of 2023. In the second quarter, as steel prices weakened and coking coal prices moved downward first, coke prices continued to weaken; in the second half of the year, coke prices fluctuated upward, and rising coal prices drove coke prices to rise. The average coke price index in 2023 is 2152.29 Yuan/ton, a year-on-year decrease of 24.26%. In the first quarter of 2024, coke price continued to drop under pressure.

(3) Downstream Demand

China's steel consumption is roughly divided into steel for construction and manufacturing. The construction industry consumes more than half of the steel and is the most important factor affecting steel demand. The construction industry mainly includes real estate and infrastructure businesses, which are highly cyclical. In recent years, the growth rate of China's fixed asset investment has slowed down. In recent years, the Chinese government has maintained the general tone of its real estate control policies, and the growth rate of real estate investment has decreased significantly. From 2021 to 2023, the national real estate development investment growth rate is 4.4%,-10.0% and -9.60% respectively. Although the real estate policy side has been optimized since 2022, the effect is not obvious, and the real estate market boom has continued to decline, which has seriously dragged down the demand for steel.

In the manufacturing industry, China's manufacturing fixed asset investment maintained a certain growth rate from 2021 to 2023, but the investment growth rate of different sub-industries was differentiated. Among them, the relevant data of the automobile industry, home appliances industry and shipbuilding industry increased significantly. The overall development momentum of the automobile industry is rapid, and under the encouragement of policies, domestic demand and foreign trade continue to increase. 

Steel Industry Outlook in China

On the supply side, under the "Double Carbon" target, both control policies of steel industry production capacity and output will continue to be implemented. And there is a ceiling of steel supply. At the same time, if the gross profit of tons of steel is still not significantly improved, the production willingness of steel enterprises will remain low, and the steel supply side is expected to be flat or slightly drop in 2024.

On the demand side, with China's "Steady Growth" policy guidance, the implementation of subsequent policies, the continued loosening of real estate policies and the issuance of trillion national bonds, the overall steel demand is expected to recover moderately, but the structural differentiation of the demand side will continue, and the proportion of steel demand for manufacturing will further increase.

In terms of price, steel prices are expected to maintain a volatile trend under the pattern of weak supply and demand. At the same time, considering that iron ore and coal suppliers still have a strong voice, the operating efficiency of steel enterprises is difficult to significantly improve.

In the short term, steel enterprises will still face certain operating pressure under the background of weak downstream demand and high yet volatile fuel prices. In the long run, as the steel industry has gradually shifted to high-quality development and steel enterprises have strengthened the trend of low-carbon, digital, and high-end products under the guidance of industrial policies in China, the industry competition situation is expected to be significantly improved in the future.