China's white goods sector tipped to weaken

Steel demand from the white goods sector benefited Chinese mills last year, but the effect of a weaker housing market is set to adversely impact demand this year.

China’s production of white goods - air conditioners, washing machines, freezers, refrigerators and televisions - totaled 532 million mt in 2017, up 11% year on year, according to data from the country’s National Bureau of Statistics. This growth rate was the highest since 2012.

However, several market participants surveyed by S&P Global Platts were concerned the growth rate could slow in 2018, dampening demand for hot dip galvanized and cold rolled coil.

One analyst said last year’s robust growth in white goods output could have been predicted in 2016, when property sales were robust. Property sales in China include a large portion of pre-sales by developers, and there is typically a one to two-year lag before they are delivered to buyers - so white goods demand generated by purchases always trails property sales.

In China, apartments are often not fitted out until the owners occupy the premises because developers do not want the equipment to deteriorate. Apartments can therefore be kept almost as empty shells for long periods of time.

Last year growth in property sales slipped amid tighter housing purchase restrictions nationwide. The central and provincial governments have issued a plethora of measures over the past 18 months to try and cool China’s overheating property market. These included lifting deposit ratios and imposing restrictions around purchases of second properties.

Though the sector proved resistant – house prices rose in most major Chinese cities in December, and a small apartment in Shanghai still costs at least $500,000 – the measures have impacted investment in residential properties.

Therefore, the outlook for the white goods market in 2018 is not so optimistic.

According to the NBS, China's overall property sales in 2016 jumped 22.5% year on year, while the increase in 2017 was lower at 7.7%. The residential housing sector, the main driver of white goods demand, increased by 22.4% on year in 2016 but rose only 5.3% on year in 2017. This slowdown will likely result in subdued white goods and appliances demand this year.

"Even if housing purchase restrictions can be loosened a bit in the second half of this year, as some people are predicting, the positive effect on white goods may not occur until 2019," a mill source said.

He said “shanty town” renovation was another major driver of demand for white goods and, compared with conventional apartments, demand was more immediate after renovation as local authorities were keen to reinstall residents. Renovation of these simple dwellings is not steel intensive, but the tenants still need fridges and air conditioners.

Data from the Ministry of Housing and Urban-Rural Development showed that about 18 million shanty town units were renovated over 2015-2017. At the start of 2017, the target for that year was 6 million new homes, receiving Yuan 224.3 billion ($36 million) in central government funding. The renovation target set for 2018-2020 by China's State Council in May 2017 is lower at 15 million units.

Another mill source said the ratio of HDG to CRC used in the white goods sector was about five to one, so HDG would be the most affected by slower growth in the white goods market.

Mill sources noted flat steel consumption from white goods was relatively minor compared with consumption by the vehicle and machinery manufacturing sectors. They believed even if there was downward pressure on the HDG market from the white goods sector in 2018, it should be limited.

Overall, the flat steel market is expected to stay in balance and be similar to 2017, therefore limiting any opportunity for flat steel prices to rise further in 2018.

Steel consumption in the white goods, vehicle and machinery sectors totaled 10 million mt, 60 million mt and 192 million mt respectively in 2017, up 5.3%, 4.8% and 5.6% on year respectively, according to China Iron & Steel Association data published by Chinese information provider Custeel.

According to some market analysts, the white goods sector makes up around 1.5%-2% of total steel consumption in China.

CISA predicted white goods would consume about 10.5 million mt of steel in 2018, rising by a slightly slower pace of 5% on year. But China Metallurgical Industry Planning & Research Institute has forecast steel demand from white goods will increase only 2.6% on year.

The domestic price of 1.0 mm thick DX51D HDG in Shanghai fluctuated in 2017 from Yuan 4,950/mt ($789/mt) in January to Yuan 4,225/mt in May, before rising to Yuan 4,945/mt in December, S&P Global Platts data showed.