China steel: Running out of room and money

Author Chris Newman, Ferrous Markets senior editor

The cuts are real this time in the wake of the coronavirus outbreak, storage is making it tough for steel mills, and construction demand will remain key for the industry.

China has kept much of its 1bn t/yr steel sector running even as demand has been severely curbed by restrictions aimed at slowing the spread of the coronavirus. Mills, already straining to store record steel inventories and running low on cash, face difficult choices if the outbreak does not ease in March.

China’s steelmakers accelerated cuts last week 

Cisa members’ average 10-day steel output

The cuts are real this time. China’s steelmakers resist output cuts because of the difficulty in shutting down and restarting the blast furnaces that dominate the industry. When output restrictions are announced such as to reduce pollution, mills will try to work around them keep output stable. But this cuts this time are lowering output. China's largest mills reduced steel output by 5.4pc to 1.8349mn t/d over 11-20 February from the previous 10 days, or down by 7pc from late January. This does not include smaller scrap-fed electric arc furnace (EAF) mills that account for 10pc of production. Most EAFs did not restart after the lunar new year holiday given negative margins, but even larger mills are feeling the storage and money shortages.

Steel inventories blow past records

China trading firms’ warehouse steel inventories

Storage gives mills no choice. Mills have resorted to storing steel stacked high in fields, at ports, in ships and barges, with stocks well beyond warehouse capacity. Mills’ stocks at 13.4mn t this week are roughly 68pc higher than the previous high.

Traders’ steel stocks in warehouses at 24mn t exceed the typical 20mn t late-winter peak before spring construction. Output cuts and increased deliveries slowed the growth to less than 3mn t this week, down from closer to 4mn t in each of the past two weeks.

Demand recovery depends on construction

Cisa 2019-20 steel consumption forecast, '000s t
Industry 2019* % vs 2018 2020 % vs 2019 Market share
Construction 486,000 8 498,000 2 55.9
Machinery 145,000 3 148,000 2 16.6
Auto 52,000 -5 51,000 -2 5.7
Ship 16,000 3 15,000 -6 1.7
Appliance 13,600 5 14,00 3 1.6
Rail 5,500 6 5,700 4 0.6
Container 5,200 -28 5,100 -2 0.6
Energy 40,000 5 41,000 3 4.6
Other 112,000 4 114,000 2 12.8

Source: Cisa

Construction demand is key. More than half of China’s steel demand comes from infrastructure and real estate construction, which is not expected to return to normal until mid-March at the earliest. It is more likely to return to normal at the end of March, with a potential delay until April. Workers are only slowly returning from home towns to construction sites, but in many cities like Beijing and Shanghai they will be required to spend 14 days in quarantine before returning to work.

Over 60pc of the machinery sector has returned, 85pc of auto factories have restarted, and 70pc of shipbuilders are operating, Cisa said. But these three sectors only account for a quarter of steel demand.

Chinese mills will have to cut output more aggressively in March, if demand is slow to return, or find room to store 3mn t steel per week.

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