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6 key drivers shaping China’s steel market amid latest COVID-19 surge

Markets have been highly anticipating steel demand recovery and more economic stimulus in the coming months, driving China's steel prices up since mid-March. However, the latest wave of COVID-19 infections in the country poses more challenges to domestic steel demand than steel production.

China's steel production is expected to rise in April, but supply chain disruptions and logistics hurdles across may parts of the country could continue to undermine end-user steel demand.

Here are six things to watch in China's steel sector at a time when the market remains over-optimistic about demand recovery.

Steel production to continue rising in April

The resurgence of COVID-19 infections in China that started around mid-March and spread across several provinces has not weighed on the country's steel production prospects in April.

China Iron & Steel Association estimated China's daily crude steel output in March 21-31 to have increased by 4.9% from mid-March to 2.788 million mt/day. Daily crude steel output in March increased to 2.709 million mt, up 1.2% from the average level in January-February despite Tangshan's city-wide lockdown since March 19.

Market sources said the uptrend in China's steel production will continue in April, especially as Tangshan, China's steelmaking hub, gradually eased city-wide lockdown since March 28. Tangshan fully lifted social restrictions on April 11, and its steel production is now expected to resume an upward trend, adding extra momentum to China's steel output growth.

"If it were not for the COVID outbreaks, China's crude steel output in early April should have already reached the level [3.26 million mt/day] of a year ago," one source said, adding the uptrend in China's steel output could accelerate in the coming months.

New blast furnaces adding fuel to soaring

Over January-March, China commissioned eight new blast furnaces with a combined 16.64 million mt/year pig iron making capacity, through capacity swaps.

But as some replaced blast furnaces have been closed years ago, the commissioning of these new facilities has still led to a net capacity growth of around 6 million mt/year.

Surge in China's steel exports unsustainable

Due to strong export order bookings received in March amid the Russia-Ukraine conflict, China's finished and semi-finished steel export volume were expected to rise in March from February's 3.91 million mt, market participants said. In April, those export volumes are expected to see a much sharper growth, jumping to around 7 million-8 million mt.

But even with the improvement in overseas demand, overall steel exports in April would be just around the level seen a year ago, providing limited upward momentum to the domestic market. In April 2021, China's overall steel exports were at 7.97 million mt.

Moreover, export orders for June shipments have dwindled, as rising Chinese prices have become less attractive and European buyers have now purchased sufficient inventories.

COVID-19 restrictions hit domestic steel demand...

The latest lockdowns in the COVID-19-affected cities and regions have compounded China's supply chain and logistical challenges: transportation has been disrupted, workers remain in isolation, and construction activities have been either halted or reduced. This situation is likely to continue as China is adhering to a zero-Covid policy.

In northern China's Beijing and southern China's Guangdong province, some local sources said transactions of construction steel in early April were just about 80%-90% of the levels of a year ago.

With the ongoing city-wide lockdown in Shanghai, the year-on-year decline in steel transactions in eastern China could only be greater than that in Beijing and Guangdong.

... while zero-COVID approach to offset stimulus effect

Market chatter indicated China might cut reserve requirement ratio or even interest rate in April, but as the zero-Covid policy continues, restrictions on mobility and transportation could reduce the effect of new stimulus.

This was clearly reflected in March when the manufacturing activity contracted for the first time in four months due to the pandemic.

China's debt-laden property sector bites into demand

Even without the COVID-19 outbreaks, the slowdown in China's property sector was already pinching the country's overall steel demand and it was expected to weigh throughout 2022.

More than 60 cities have largely eased restrictions on home buying in early April, but some sources believe property sales were unlikely to bottom out at least until after the first half of this year, and new home starts in 2022 could drop by as much as 20%-30% on the year.

Some of the sources also said due to lack of traditional infrastructure projects and high local government debt, the growth rate of China's infrastructure investment in 2022 was likely to be just at low single digit, far from enough to offset the slowdown in property steel demand.

China's excavator sales in the domestic market, an indicator of construction activity for upcoming months, dropped 63.6% on the year in March, deteriorating from a 30.5% year-on-year drop in February, data from China Construction Machinery Association showed April 8.

Despite more favorable polices expected to aid steel demand, factors such as rising steel production in hubs like Tangshan, uncertainty around pandemic-related restrictions and a lackluster improvement in the property sector will remain key indicators of what could be in the store for steel markets in the upcoming months.

Source: S&P Platts

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