17 Feb 2020 | 07:17 UTC — Singapore

China finished steel consumption seen down 30% on year in March

Highlights

Finished steel consumption estimated to fall 75% on year in Feb

Crude steel output loss in Feb estimated at up to 10 million mt

Increase in finished steel stocks over Jan-Feb equal to 30% of typical March consumption

Singapore — China's finished steel consumption in March is estimated to fall at least 22 million mt year on year, equating to 19 million mt of pig iron consumption and down 30% year on year, due to the coronavirus outbreak, S&P Global Platts calculations based on available data showed Monday.

This will follow a reduction of at least 29 million mt in finished steel consumption in February, down 75% on year and equating to pig iron consumption of 26 million mt, Platts' estimates showed. The reduction would have been greater at 31 million-43 million mt if China's Lunar New Year holidays had not fallen in February in 2019, and in January this year.

The estimates of domestic steel demand loss in February and March are based on China's official prediction that the coronavirus outbreak could plateau in mid- to late February and end by April.

Platts estimates manufacturing activity averaged 22% of normal levels over February 10-16, based on passenger data in major provinces and cities provided by Chinese search engine Baidu and manufacturing business income data in each province. This indicates that most Chinese migrant workers had yet to return to their city of employment after the Lunar New Year holidays.

The China Association of Automobile Manufacturers said 32% of its 183 members had restarted operations by February 12. However, some sources said it was likely most were unable to operate at full capacity due to a lack of workers and auto parts.

Construction activity remained largely suspended over February 10-16, with steel traders saying there had been almost no demand for long steel. Construction sites were unlikely to resume until at least February 24.

China's Ministry of Transport said railways moved 38 million passengers over the first 20 days of the Lunar New Year (January 25-February 13), down 170 million from the same period of 2019.

Even if passenger number rebound to 2019 levels this week, only half the workers would be able to return to their city of employment by end February, and most are unlikely to return until the week of March 9 even in the best-case scenario.

Given migrant workers may face more days under quarantine upon arrival, operating rates in China are unlikely to reach 50% of normal levels until at least end February and full capacity until late March.

Both the manufacturing and construction sectors are facing shortages of labor and protective gear such as masks, difficulties in meeting strict protection protocols imposed by local governments, and interruptions in logistics and supply chains.

The manufacturing sector is likely to resume operations more quickly than the construction industry, which has far greater staff mobility. As a result, flat steel demand recovery is likely to outperform long steel in the short term.

However, some construction industry sources expect restarts at building sites to accelerate quickly in March, not only because they expect the outbreak to be contained, but also because construction companies, especially small ones, will face cashflow problems if work remains suspended.

"Some construction companies will have to restart in March to survive," one source said, adding local governments may relax stringent restrictions to support them.

Steel oversupply looms

While China's steel mills have gradually intensified output cuts amid weak demand and logistics constraints in receiving raw materials and delivering finished products, oversupply seems inevitable in the domestic market in February-March.

Platts estimates 7 million mt of crude steel production will be trimmed in February.

Some market sources expect there will be more output cuts before the end of the month, taking the output loss to 10 million mt in February.

However, other sources doubted steel mills would strictly implement output cut plans as margins, while slim, were profitable, and could ramp up quickly once logistics and supply chains normalize.

As of February 12, China's hot rolled coil domestic sales profit margin was $11/mt and rebar $24/mt, according to Platts' calculations.

Even if output cuts were carried out as planned in February and extended into March, oversupply was likely due to soaring finished steel inventories.

Finished steel inventories at mills, in transit and held by traders was projected to increase by 19 million mt in February, based on Platts' estimates of domestic end-user demand falling by 29 million mt and output falling by 10 million mt in the month.

Exports in February are expected to be steady to lower than in 2019 as orders for February shipments were subdued, traders said. Orders received in February for late March and April shipments have also been poor as overseas buyers monitor falling Chinese steel prices.

The China Iron & Steel Association said finished steel inventories at its member mills and monitored major steel markets rose 5 million mt month on month to 21 million mt in January. Added to Platts' estimated build for this month, this would take China's finished steel inventories to 40 million mt by end February -- up 24 million mt from end December, which equates to more than 30% of apparent consumption in a normal March.

Oversupply in March is likely to ease only if end-user demand recovers quickly and steel mills maintain sharp output cuts in the month.

Policy support

China has moved swiftly at a policy level to support its enterprises, such as injecting liquidity into markets, setting up a special Yuan 300 billion ($42.9 billion) refinancing loan, deferring loan repayments for impacted enterprises and increasing bank tolerance of non-performing loans.

Market sources expect China to further loosen monetary policies and step up government spending later this year to stimulate growth, which would benefit property and infrastructure construction, which together account for around 55% of China's total steel consumption.

Some local governments have already slightly loosened restrictions on property purchases and sales, such as reducing or removing home purchase taxes and allowing earlier property presales.

Amid expectations that steel demand from the construction sector will be stronger in the second half of 2020 than in H1, the spread between October and May rebar futures contracts on the Shanghai Futures Exchange narrowed to minus Yuan 55/mt on February 14 from minus Yuan 75/mt ($11/mt) on February 3, with the October contract rising 9% over February 3-14 and the May contract rising 5%.