SMM Review and Forecast of China Steel Market Supply and Demand 2022-2023

SHANGHAI, Dec 29 (SMM) - Looking forward to 2023, SMM believes that steel price will be less volatile. On the other hand, considering the palpable economic development pressure at home and abroad, the prices of commodities such as steel may be re-valued under pessimism. As such, steel prices are likely to stay on the downward track throughout 2023.

Macro front

The US Fed aggressively raises interest rates amid high inflation, and recession fears keep investors on edge

In 2022, the US CPI refreshed the record high in 40 years. The adoption of a non-linear and more aggressive measures by the US Federal Reserve to rein the inflation greatly hurt the confidence of the American people, which subsequently rattled the global market.

Inflation remains high in the world's major economies, which has heightened recession expectations.

It is reported that the PMI of major economies in the world, including the United States, the eurozone, and Japan, showed a downward trend since entering 2022. The current global economy is facing multiple challenges.

Inflation has reached its highest level in decades. As such, the living cost crisis, tightening financial conditions in most regions, the crisis in Ukraine and the ongoing COVID-19 pandemic have seriously affected the outlook for global economic growth.

Domestic policies are firm to stabilise economic growth, fuelling the economic to bottom out

Different from the situation of continuous interest rate hikes abroad, in 2022, the Chinese government has been firm on steady economic growth. But from a structural point of view, the domestic demand is still weak. A loose liquidity environment is formed, but the effect of the policy needs to be further verified by the real economy.

With reference to the economic development path after overseas pandemic prevention measures are relaxed, the number of infections in China will increase significantly in the next six months, which may have a negative impact on the domestic economy

Referring to the economic development path after the relaxation of pandemic prevention in overseas countries such as Japan and Thailand, it is expected that the number of domestic infections will spike in the next six months, which may have a negative impact on the domestic economy.

It is also worth mentioning that since the beginning of this year, due to the impact of black swan events such as the conflict between Russia and Ukraine, the global economy has weakened. Therefore, it was only in March and April this year that Japan, Hong Kong, Taiwan and other regions were gradually released from strict pandemic control measures. It is also difficult to fully hedge the negative impact of the downturn in the global economic cycle on corporate profits by policy easing alone.

The stock indexes of European and American countries rebounded after the relaxation of the pandemic control measures, while the stock markets of Southeast Asia generally fell

According to the statistics of the media, the differences in the global economic cycle and the timing of relaxing pandemic control have led to differences in profit recovery after marginal improvements in the pandemic prevention and control policies of various countries. Stock markets in Europe, the US and Southeast Asia have recovered, while those in East Asian countries and regions were in a downward phase.

According to the opening path of 10 countries counted by Industrial Securities, in the three months after the full withdrawal of pandemic control scheme, seven countries and regions experienced declines. But except for South Korea and the United States, the other eight countries and regions recorded growth as of now.

Demand

SMM steel downstream PMI in the contraction zone for most of 2022, and steel consumption weighed on by poor industrial prosperity

According to SMM survey, China's steel downstream PMI declined as a whole from January to November 2022 compared with the same period in 2021. Specifically, seven months in 10 recorded a PMI reading of below the 50-point mark. The seasonally adjusted PMI print showed that the results from March to October 2022 were all in the contraction zone. In 2022, the overall downstream demand for steel has been disappointing due to the decline in the prosperity of the downstream steel industry as well as the spreading pandemic.

The decline in domestic steel demand in 2022 is mainly due to the weakening construction industry

The decline in domestic steel demand in 2022 is mainly due to the weakening construction industry based on the output changes of all steel varieties as well as the apparent consumption in downstream sectors in the first ten months of 2022.

In terms of real estate, it is known from market data that in 2022, the sales performance of completed homes in China have dropped to the second-lowest level in history, and the sales of off-plan homes were also gloomy, especially in third-tier cities. In terms of housing prices, the domestic housing price index has declined overall since the second half of 2021, among which the decline in second and third-tier cities has been more significant, and housing prices in first-tier cities are still resilient. Meanwhile, although the mortgage interest rate has dropped sharply in 2022, and some cities have relaxed the loan threshold for the first home, the residents' willingness to buy houses is not strong, which restricts the effect of relative policies to a certain extent.

Nevertheless, in 2022, the policies on real estate has been launched frequently, including credit financing, bond issuance financing, and equity financing targeting the financing dilemma of real estate companies. Based on the data in previous years, SMM expects that the pivot for a new round of real estate growth may appear in the second half of 2023.

Infrastructure: in 2022, from moderately advanced infrastructure construction to comprehensive strengthening of infrastructure construction; in 2023, general infrastructure investment is expected to progress at a relatively rapid speed

As an important pillar for the economy, looking back on the past 15 years, China has experienced rapid growth in infrastructure investment for four times. And the growth was extremely prominent in two time periods. The first is in 2008-2009, when the global financial crisis broke out. At that time, real estate investment was down, and the GDP growth rate dropped from 14.23% in 2007 to 9.65% in 2008, indicating a rapid economic downturn. In order to hedge against the economic downturn, infrastructure investment has played an active role. The second period is 2020-2022, when the pandemic-induced lockdown impacted the economy. In 2022, the pandemic repeatedly hit the economy with triple pressure of demand contraction, supply shock, and weakening expectations, and the infrastructure investment rose to a new level.

Infrastructure: The source of funds for infrastructure investment is guaranteed

Different from the situation where real estate financing is difficult, the source of funds for infrastructure investment is guaranteed, including national budget, domestic loans, self-raised proceeds, and utilisation of foreign capital.

In 2023, infrastructure investment is expected to continue to maintain positive growth

In order to revitalise the remaining funds, special bonds in 2023 are expected to be issued in advance. On September 28, the State Council held a meeting to stabilise the economic market in the fourth quarter. At the meeting, it was proposed to approve some quotas for special bonds in 2023 in advance according to law. In response to the call of the State Council, many local governments in China have successively held special bond project-oriented conferences to promote infrastructure construction. According to relative requirements, the infrastructure projects approved in advance are expected to be launched physically in 2023.

At present, many provinces and cities, including Hunan, Jiangxi, and Hebei, have issued local special bond plans for 2023. It is expected that infrastructure investment in 2023 will continue to maintain positive growth.

Infrastructure & Automobile & Shipping: As a counter-cyclical adjustment tool, infrastructure investment will maintain positive growth in 2022; in addition, the total demand in the automotive industry and the shipping industry is expected to grow year-on-year

In 2022, the infrastructure industry has become a key tool for counter-cyclical adjustment and steady growth. Affected by the pandemic in the first half of the year, the actual launching of projects was delayed. The overall progress accelerated in the second half of the year, but the pandemic has adversely affected the construction of infrastructure projects across the country.

In 2021, the number of new ship orders stood at 1,846 with a revised gross tonnage of 45.73 million in 2021. Among them, China has undertaken 965 orders with a revised gross tonnage of 22.8 million, ranking first in the world with a market share of nearly 50%. In 2021, China's new ship orders added 223.3% year-on-year, hitting a five-year high. Due to the long shipbuilding cycle, so far, domestic shipbuilding companies have enough orders on hand, and the demand for ship-oriented steel will maintain steady growth until 2025.

In terms of automobile, the domestic chip supply shortage eased slightly in 2022, and the drastic growth of new energy vehicles will drive the overall automobile production and steel demand with positive growth year-on-year.

Machinery - excavators: dragged on by the decline in operating rates of domestic construction industry, sales of excavators performed poorly in 2022, but the growth in overseas demand hedged the falling domestic demand to a certain extent

In November 2022, excavator sales across 25 producers totalled 23,680 units, up 15.8% on the year, according to CCMA. Sales in Chinese domestic markets added 2.74% to 14,398 units, and export sales rose 44.4% YoY to 9,282 units. From January to November, a total of 244,477 excavators were sold, a year-on-year fall of 23.3%. The domestic sales were 145,742 units, down 43.7% YoY, and the exports stood at 98,735 units, up 65.1% YoY.

The output of domestic excavator dropped sharply year-on-year in 2022, and the decline narrowed in the second half of 2022 based on a low base in 2021. Considering that the last round of centralised replacement of domestic excavators occurred around 2020, domestic excavator sales will mainly rely on the recovery of the construction industry. According to SMM, the main reasons for the continuous increase in the export volume and a sharp advance in the proportion in recent years include:

1. Domestic brands have enhanced their presence in overseas regions such as North America and Southeast Asia, which accommodates strong demand for excavators;

2. Domestic enterprises have seized the opportunity to actively set foot on the export business and increase investment in research and development of related products. In developed economies such as Europe and the United States, Chinese construction machinery brands are with strong competitiveness and continuously improving cost performance;

3. The competitive advantage of construction machinery exports have improved driven by the devaluation of the RMB;

4. Overseas construction machinery manufacturers are restricted by the disrupted supply chain owing to the pandemic, resulting in a mismatch between supply and demand.

Looking ahead, SMM believes that both the penetration rate and presence of domestic brands is increasing overseas. It is expected that the export volume of Chinese excavators will continue to increase in the future. While the growth rate may gradually slow down, the proportion of exports may still have some room for improvement.

In the medium and long term, the increase in the proportion of exported excavators in the future will offset the poor domestic sales. But in the short term, the demand for steel in the excavator industry will still decline year-on-year amid sluggish sales as a whole in China.

Home Appliances: insufficient growth engines in infrastructure & manufacturing sectors highlighted the demand contraction in real estate

It is reported that in October, the output of washing machines, air conditioners, refrigerators and colour TVs in China all showed a year-on-year decline. Therefore, it can be seen that the lack of growth in infrastructure & manufacturing sectors has highlighted the reduction in demand in the real estate industry.

Supply

Total supply of crude steel: From January to November 2022, the national crude steel output fell 1.4% year-on-year, and it is expected to drop about 15 million mt or 1.5% year-on-year throughout 2022

On April 19, the National Development and Reform Commission stated that it will keep reducing national crude steel output in 2022, guide iron and steel enterprises to abandon the immature development method of winning by quantity, and ensure that the national crude steel output in 2022 will be reduced year-on-year. The venue of steel mills this year has been much weaker than last year. Coupled with the production reduction requirements, it is estimated that the crude steel output will fall about 15 million mt year-on-year in 2022, and the average daily crude steel output from October to December will stand at about 2.6 million mt, which is lower than the level in the second quarter this year.

In terms of production capacity, domestic ironmaking capacity will show a net increase in 2022. Due to the impact of policies in 2021, a large number of blast furnaces were eliminated in advance, while the commissioning of new production capacity was postponed. In 2022, the overall progress has been revised on the basis of 2021, hence the overall ironmaking capacity will show a net increase in the year.

Revenue: Domestic steel mills have continued to lose money since the second quarter. In the next year, steel mills may face long-lasting profitability issues and reduce the production voluntarily to contain the losses, which will become the main driving force for the decline in steel output

In 2022, the profits of domestic steel mills have declined significantly. On the one hand, weaker downstream demand weighed on the steel prices. On the other hand, taking hot rolled coil (HRC) as an example, many domestic hot rolling production lines were put into operation in the past two years. Overcapacity has led to vicious competition. Therefore, the profit of HRC has been lower than in previous years and lower than that of other steel varieties in the same period.

In the long run, the process of reducing domestic crude steel production capacity has been smooth, but the downstream consumption has also shrunk sharply in the past two years. The profits of steel mills will become an important factor to determine steel production.

In recent years, domestic HRC capacity has expanded rapidly. It is expected to match the growing demand for prefabricated steel structure buildings in the long run, but in the short term, it may face certain supply pressure

In recent years, domestic HRC capacity has expanded rapidly. According to SMM research, in 2021, seven domestic hot coil production lines were put into operation, and five in 2022, with a total annual production capacity of 38.9 million mt. The capacity is likely to grow further in 2023, highlighting short-term supply pressure.

Nonetheless, in the long run, prefabricated steel structure buildings are increasingly popular in recent years, with more extensive application of HRC-based steel structure. SMM predicts that the overall demand for HRC will still have room to rise in the future.

Import and export

Affected by the conflict between Russia and Ukraine in 2022, steel exports prospered in stages; in the long run, steel supply at home and abroad will be abundant, and steel exports are expected to decline in 2023

In terms of imports, in the first half of the year, overseas steel prices were generally higher than those in China. And the poor domestic demand further weighed on the import volume. In the second half of the year, overseas steel prices dropped sharply, and the prices of some varieties were even lower than domestic prices, and the steel imports rebounded slightly in the third quarter of 2022. But the annual steel import volume will be lower than in previous years.

In terms of export, due to the impact of the conflict between Russia and Ukraine, overseas steel prices began to rise sharply at the end of February. Chinese steel companies received a large number of export orders from the end of February to March, and shipped them around May. Since April, overseas steel prices have plummeted, and global steel downstream demand weakened as well, resulting in steeply falling export orders received by domestic companies. The export volume dropped in the third quarter.

Price forecast

According to the supply and demand balance sheet compiled by SMM, in 2023, the demand for steel in the construction industry will bottom out, and there is likely to be a year-on-year decline of about 2.8%.

Steel prices may fall to some extent in 2023 with mounting economic development pressure though demand is likely to bottom out

In 2022, the prices of major products in the steel industry continued to fall after a slight rise boosted by the conflict between Russia and Ukraine at the beginning of the year. However, the prosperity of the domestic real estate-based downstream industry sagged sharply, which, coupled with the lingering pandemic, put steel prices on the downward track since late April. The poor downstream consumption has become the main factor of falling steel prices and crude steel production throughout the year. Looking forward to 2023, SMM believes that steel price will be less volatile. On the other hand, considering the palpable economic development pressure at home and abroad, the prices of commodities such as steel may be re-valued under pessimism. As such, steel prices are likely to stay on the downward track throughout 2023.