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China's distressed property sector, rising steel output offer bleak market outlook

Highlights

China's new home sales in August drops 31% on year

Property sector's drag on steel demand to continue through 2023

Further steel output cuts in 2022 may be limited

China's property sales continued to trend lower in August, despite more policy easing for home buyers and loan interest rates already below 2009 levels.

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Steel market participants contacted by S&P Global Commodity Insights expressed bearish views, predicting the drag on steel demand from the property sector to continue through 2023 and that upcoming winter steel output cuts may not be enough to fully offset weak demand.

Property weighs on steel demand

The floor space of China's home sales in 30 major cities dropped further in August, down 13% month on month, according to latest data from China Real Estate Information Corporation, a Chinese property information provider. That followed a 16% decline in July. Sales in August were also down 31% year on year.

Longfor Group, a major Chinese property developer, said in late August that the value of China's new home sales in 2022 might drop by 30% year on year. The National Bureau of Statistics reported China's new home sales value over January-July dropped 29% from the same period of 2021.

That means the decline in home sales for the rest of 2022 is unlikely to be modest.

Some steel market sources said they thought the sector's debt crunch might have stopped worsening as the government ramped up financial support for both developers and home buyers, but new home sales and starts are still a long way from recovery.

"The focus of the property sector in the coming year will still be on project completion and on-time delivery of presales, rather than on new home starts. And even if sales and new starts begin to recover at some point in 2023, it will be hard to get back to 2021 levels anymore," a market source said.

The main reasons behind slowed sales include stalled population growth, near complete urbanization, and stagnant household income due to the pandemic resurgence.

The property sector accounts for one-third of China's steel consumption.

Shanghai-listed Baosteel said Aug. 31 that China's infrastructure construction and steel demand would gradually recovery in the fourth quarter, but steel demand would remain under pressure as the biggest steel consumer, the property sector, remained "in a deep adjustment."

Prices under pressure on bleak outlook

"Most major steel mills actually have been fully booked for September delivery, and steel market inventories are currently low," a mill source said. "However, steel prices have remained on a downward trend recently, indicating a very bleak outlook held by traders and end-users towards steel demand."

Rebar inventories in eastern China's trading hub of Hangzhou in early September are down nearly 40% year on year because of steel output cuts and destocking by traders, according to market sources.

However, Platts assessed Chinese domestic rebar prices down 3% from the end of August to Yuan 4,060/mt ($587/mt) on Sept. 2, also 23% lower than on the same day last year, according to S&P Global data.

Some steel traders said steel demand did improve recently in tandem with favorable cooler weather, but overall steel demand in September and October is unlikely to be strong, driven down by the distressed property sector and frequent resurgence of COVID-19 .

Moreover, China's steel output has recently been increasing rapidly, also dampening market sentiment.

"Even if China sets out to reduce its crude steel output [in 2022] by 20 million mt from 2021 levels, further steel output cuts from the current level will be limited," a market participant said. "That's why the market is currently concerned about a supply glut in the coming months."

In a bid to reduce the country's crude steel output from 1.035 billion mt in 2021 to 1.015 billion mt in 2022, daily crude steel output over September-December will be kept within 2.633 million mt/day, down by about 3.7% from August, but still about 0.2% higher than in July, according to calculations by S&P Global based on data of NBS and China Iron & Steel Association.