China's steel prices saw a rollercoaster ride in 2021 owing to mandatory steel output cuts aimed at reducing the sector's carbon emissions. Markets are expected to see less volatility in 2022 as similar tough output cuts are unlikely to this year.
China's crude steel output is expected to rise in the first half of 2022 and then decline in the second half, with full-year production remaining within 2021 levels, industry sources and market participants told S&P Global Platts.
The fluctuation in steel prices is expected to narrow, but average annual prices may drop a notch due to sluggish demand in general.
Chinese domestic hot-rolled coil prices in the Shanghai spot market fluctuated between Yuan 4,420/mt and Yuan 6,680/mt in 2021, with an annual average of Yuan 5,320/mt, according to Platts assessments. Market participants contacted by Platts expected 2022 prices to range between around Yuan 4,000/mt and Yuan 5,500 /mt.
Here are the factors that are expected to move China's steel sector this year:
1. Shrinking demand from property and construction
China's property development is expected to remain on downward track in 2022. Growth is seen to be limited this year after the sector received heavy chunks of stimulus over 2016-2020.
Another pullback for the sector is China's urbanization, the core driver of its property development and steel consumption over the past 20 years, which reached about 64% by 2020, according to Ministry of Housing and Urban-Rural Development. Urbanization typically slows down and becomes less steel intensive after the rate breaches 60%.
China's introduction of a blanket property tax in the near future and falling birth rates will also bring long-term downward pressure on property development.
On the other hand, China has also started loosening its monetary policy and eased financing restrictions in the property sector since late 2021. This will alleviate the slowdown in property investment probably starting in Q2, but that would not be enough to reverse the sector's downward trend.
2. Manufacturing resilient, but concerns lie ahead
In most of 2022, manufacturing may continue to be more active than construction sector in terms of steel demand. As a result, flat steel profit margins are likely to remain higher than long product profit margins this year.
Some market sources said strong overseas demand for Chinese manufactured goods was the key factor behind this. However, it's almost certain overseas demand will decline at some point in H2, with operations at factories in other markets gradually returning to normal, and coinciding with tightening monetary policies in the US.
Some sources were also worried that domestic demand might remain as sluggish as in 2021. They said Chinese household incomes were unlikely to have much improvement to boost consumption, while slowing property investment would continue to undermine construction related manufactured goods, as well as home appliances.
3. Decarbonization in focus
China has announced to make industrial growth its top priority in 2022 and has erased steel output cut requirements in its 2022 decarbonization policy. Some mill sources said capping crude steel output within 2021 levels is a long-term policy.
But most mills, especially those outside of northern China, are expected to boost their production to full capacity starting January, and only start to reduce output some time in H2. This is partly because steel demand is expected to be better in H1 than in H2, while government interventions aimed at steel output are also less stringent at the start of the year.
China slowly shifting some of its steelmaking process from traditional routes to electric arc furnaces is expected to help its steel industry chart its path to carbon neutrality. EAFs are considered emission friendly than the typical blast furnaces as they mostly consume ferrous scrap, involving a much lower carbon emitting process.
4. Clear skies for Winter Olympics
Steel mills in northern China's Hebei, Shanxi, Henan, Shandong province, as well as Tianjin municipality, have been required by central government to keep their crude steel output from Jan. 1 to March 15 at 30% lower than in the same period of 2021. This aims to reduce winter smog and guarantee clear air for the Winter Olympics held in Beijing Feb. 4-20.
As a result, China's daily pig iron and crude steel output in January-February could reach 2.11 million mt/day and 2.59 million mt/day respectively, according to Platts calculations based on the output cut requirements and output figures over the same period of 2021.
Pig iron and crude steel output over the first two months of 2022 could still be lower than a year ago, with National Bureau of Statistics data showing January-February 2021 numbers at 2.45 million mt/day and 2.97 million mt/day, respectively.
Both pig iron and crude steel output in January and February could rise from December levels, which were at 2.32 million mt/day and 2.78 million mt/day, respectively.
Starting from March, winter steel output cuts in northern China will gradually come to an end. In tandem, China's pig iron and crude steel output may reach or even exceed the levels of a year ago some time in H1.
5. New iron and steel making capacity
A total of 86 million mt/year of pig iron and 108 million mt/year of crude steel making facilities were planned to be commissioned through capacity swaps in 2021 but as of December only 34 million mt/year of pig iron and 36 million mt/year of crude steel capacity were commissioned, according to Platts Analytics.
The commissioning of new iron and steel making capacity in China is expected to accelerate in early 2022. As some of the replaced facilities were closed a long time ago, and new facilities are in general more efficient than the old ones, the commissioning of these new facilities could still lead to some capacity expansion in early 2022.
However, China's total iron and steel making capacity might gradually trend downwards from late 2022 or 2023, as capacity swap rules get more stringent. In particular, commissioning of new blast furnaces and converters must be strictly predicated on closing old ones first, of larger capacity and still in running.
6. Overseas demand
Despite a dim outlook for domestic steel demand and an expected drop in Chinese steel prices, China's steel exports in 2022 may just hover around 2021 levels, as capping steel exports is part of the decarbonization plan in the steel industry.
Some market sources said strong overseas demand for Chinese manufactured goods was the key factor behind the strong export program seen in 2021. China's net exports of semi-finished and finished steel jumped 155% year on year to 38.903 million mt in 2021.
However, it's almost certain for overseas demand to decline at some point in H2, while the sources were worried that domestic demand might remain as sluggish as in 2021.
Source: S&P Platts