China’s Steel Market Challenges

China’s steel market has undergone a significant price drop last week, according to analysts from BofA Securities. Steel export prices have sharply declined, with hot rolled coil (HRC) prices falling by $31 per ton to $449 per ton, and rebar prices decreasing by $28 per ton to $462 per ton.

This reduction in prices highlights ongoing challenges within the Chinese steel industry, fueled by weak demand and economic headwinds.

BofA analysts reported that cash margins for Chinese steel producers exhibited mixed results. Spot cash margins for rebar improved slightly by RMB35 per ton but remain negative at -RMB45 per ton. Conversely, HRC margins worsened, declining by RMB112 per ton to -RMB23 per ton. This predicament has led many steelmakers to implement voluntary production cuts, which have resulted in decreased utilization rates for both blast furnaces (BF) and electric arc furnaces (EAF).

Between August 9th and 15th, the BF capacity utilization rate dropped by 110 basis points to 85.92% among the 247 steel producers tracked by Mysteel. Broader market sentiment remains bearish, as noted by Hu Wangming, Chairman of China Baowu Steel Group, who described the current conditions in the Chinese steel sector as a “harsh Winter” that could be “longer, colder, and more difficult to endure than we expected.”

The analysts expect that ongoing weak steel demand is unlikely to change in 2024-25, primarily due to a severely depressed property market, which accounted for approximately 29% of China’s steel demand in 2023. New construction starts have plummeted by 52% from their peak in 2021, continuing this trend with a 24% year-over-year decline in the first half of 2024. Worsening infrastructure investment conditions, as key projects reach completion with few new initiatives underway, further compound these challenges.

In light of these factors, the outlook for China’s steel sector remains daunting, with continued pressure on prices and profitability anticipated in the near to medium term. BofA analysts suggest that without a significant improvement in demand, the steel industry in China may continue to face low prices and reduced margins well into 2025.