China's Steel Industry Braces for More Production Cuts as Demand Slumps

The Chinese steel industry is bracing for further production cuts as demand continues to sag, with the protracted downturn in the real estate market and shrinking factory activity pushing domestic prices sharply lower. The nation's top steelmaker has warned that the industry is facing a crisis more severe than the downturns of 2008 and 2015, as market sentiment remains bearish and mills struggle to maintain profitability.



Output in July plunged about 9% on both the month and the year to 82.94 million tons, the lowest figure reported in 2024, according to the statistics bureau. This leaves the total over the first seven months at 613.72 million tons, 2.2% off last year's pace. The steel market's main pillar of demand, construction starts, has been weakened by the sluggish property sector, with new home sales in a prolonged funk and foreclosures mounting. Home prices continued to fall in July, albeit at a slightly slower pace, offering few incentives for developers to build afresh.

At the same time, the government has been unwilling to offset the weakness by ramping up spending on infrastructure, which has historically helped rescue the market during previous downturns. The upshot is that Chinese steel consumption may contract as much as 3% in 2024 following a similar decline last year, according to Bloomberg Intelligence. Stricter quality requirements on some products, including rebar used in construction, have probably amplified the cuts to production. The new government standards come into effect on Sept. 25, incentivizing mills to limit output and clear stockpiles of older material before it becomes obsolete.

The steel industry has been plagued by overcapacity for years, and the government has been trying to cap production at or below the previous year's level after output ballooned in 2020 to well over 1 billion tons. That task is likely to be easier this year as supply discipline is forced on mills looking to buttress their margins. It could also offer some relief to the countries grappling with the impact of cheap Chinese exports on their domestic markets.

However, the long period of negative margins in the Chinese steel industry has started leading to rising steel exports and some mills stopping production completely. This will undoubtedly result in Chinese steel production falling in 2024 – the fifth time in the 2000s that we see a y/y fall in the country’s steel output and a decline in iron ore consumption. CRU, an independent research and consultancy group, has received many questions regarding this decline and whether this is the beginning of another 2015–2016 crash. While the current downturn will not be as severe as 2015, the steel industry faces a prolonged rebalancing due to the ongoing demand weakness and overcapacity challenge.

Domestic demand remains above 2015 levels, but the protracted crisis in China's property market and the changing nature of its economy have set the industry up for more pain. Decades of expansion driven by construction and state investment are at an end, and new growth areas for the industry aren't enough to replace those drivers. The government is shifting its focus to greener, high-tech growth and consumption, which is shrinking steel's importance to the economy. The worst is not over, and almost all steel mills are bleeding, according to John Chen, Standard Chartered Plc's regional head of commodities sales in Singapore.

Chinese research firm Mysteel expects output to sink to less than 900 million tons by 2030, and some projections for demand are even more stark. From over 1 billion tons in 2020, Chinese steel consumption could fall below 800 million tons by 2030, according to the base case forecast by Bloomberg Intelligence. Its worst case is that consumption plunges to 525 million tons by the end of the decade. Those kind of predictions have lit a fire under efforts to consolidate the industry, which are likely to speed up this year as mills struggle to maintain cash flow and margins. The sector has lost money for most of the year, while its total debt had climbed to a record 5.1 trillion yuan ($696 billion) by November, according to the statistics bureau.

Smaller, private mills are most vulnerable as they tend to focus on construction steel and are more geared to the crisis in the property market, said Mysteel analyst Yu Chen in Shanghai. In the latest earnings period, steelmakers recorded their weakest free cash flow for a third quarter since 2015, according to Bloomberg calculations based on 59 steel mills listed on the mainland. Their debt-to-asset ratio, meanwhile, increased to the highest since 2017.

Although the sector's contribution to the economy has lessened over the years, it was still worth 5.7% of nationwide gross domestic product in 2023, according to an estimate by Gary Ng, senior economist at Natixis SA in Hong Kong. That has implications for the growth targets set by local governments, including the biggest steel producing province of Hebei. If we are expecting another harsh winter for the Chinese steel industry, several regional governments may particularly struggle. Hebei province has already shown signs of significant strain, with its main steel hub of Tangshan reporting losses of 3.1 billion yuan in the first 10 months of last year.

Exports, which helped shore up demand last year, are also facing a decline as importing countries step up anti-dumping measures and tariffs. Domestically, rising usage by manufacturers and carmakers are helping to offset the housing market’s weakness, but they aren’t enough to completely fill the shortfall. The real estate sector must stabilize before we can see a floor to steel demand or production, said Jinshan Xie, an analyst at Shanghai-based Horizon Insights.

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