Crude steel production in China may drop by as much as 50 million metric tons (t) during the second half of 2022 as the country's struggling real estate industry pushes steel demand downward, according to shipbroker BRS Group.
The shift is expected to weigh on import demand for iron ore and coal used to make steel.
The expected decline in steel production, following the downward trend observed in the second half of 2021, comes as new construction in China has hit levels last seen during the 2008 financial crisis, according to BRS.
Demand for dry bulk shipments into China has been particularly weak this year because of China's strict Covid-19 lockdown policies and the waning real estate sector, with coal imported from the US sliding considerably compared to the previous year.
Chinese demand for imported seaborne coal may continue its slide in the future for multiple factors, in addition to the expected drops in steel production. China has announced it will lower coal usage by 2026 and has also completed rail projects that could come at the expense of waterborne volumes, according to BRS. Furthermore, China has boosted domestic output of coal to record levels in the first five months of 2022 following shortages of thermal fuels for power generation late last year.
Relations with Australia
These factors may offset any increases in demand associated with the recent suggestion that China could mend trade relations with Australia and allow Australian coal back into the Chinese market after its unofficial ban in late 2020, according to BRS.
The new railway means that coking coal can travel 1,200km to China's steelmaking hub in the Hebei province, and moreover Australian thermal coal prices exceed Chinese domestic prices, according to BRS, so the arbitrage would be shut.
"Easing the ban or not doesn't make much difference unless the imported price of the Aussie coal comes to the competitive level to procure," said BRS. and even if it does, the quantum is unlikely to recover at significant levels."
But Australian coking coal may be more competitive for Chinese importers if relations do improve between the countries. The price for domestic Chinese premium hard low-volatile metallurgical coal is at $371.25/t today, nearly $150/t more expensive than the Australian equivalent at $227.85/t.
In addition, the freight rate for a Panamax-sized vessel from the east coast of Australia to South China is at $19.20/t today, meaning Australian coking coal would still hold a significant discount even with accounting for freight.
