China's rising HRC capacity weighs on margins but favors downstream sector

With China's shift from long steel production to flat steel continuing in 2023 amid more brand-new hot strip mills coming on stream, profit margins for hot-rolled coil face pressure, but this has lent support to the downstream sector, according to market sources.

The rise in flat steel production in tandem with the capacity expansion is in line with the economy's gradual shift from the property sector to the manufacturing sector, market sources said. However, such rapid capacity growth has also weighed on flat steel prices, they added.

Rising HRC capacity

So far in 2023, China has commissioned five hot strip mills with a combined production capacity of 10.9 million mt, an analysis of a company and source data by S&P Global Commodity Insights showed.

During the rest of 2023, 10 new hot strip mills, with a total output capacity of 31 million mt/year, are scheduled to come on stream, according to industry sources.

China's hot-rolled coil capacity has been expanding rapidly since 2019, following the country's steel capacity swap campaign launched in 2018, which has led to a crude steel capacity growth of close to 70 million mt/year by mid-2023, S&P Global data showed.

Over 2019-2022, China had brought about 85 million mt/year of brand-new hot strip mills on stream, according to company and source data.

According to mill sources, some steelmakers building the hot strip mills include long steel producers, aiming to expand business in flat steel markets. Additionally, some others already producing narrow strip or flat steel are looking to upgrade products or produce wider and higher-end products to become more competitive in the market, they added.

Most of the steelmakers commissioning or planning new hot strip mills have also built new iron and crude steel-making facilities, with capacity quotas purchased from other mills through China's capacity swap mechanism.

Higher production

Despite a month-on-month drop of 4.8% in China's crude steel output in August, the production of medium-width HRC, a major HRC product and indicator for the flat steel market, still increased by 3.4% on the month and 33.2% on the year to 18.01 million mt, data from the National Bureau of Statistics showed.

In tandem with the expanding HRC capacity, China's production of medium-width HRC increased by 12% on the year over January-August to 135.75 million mt.

The medium-width HRC output over the first eight months accounted for about 19% of China's total crude steel output, up from 15% in 2019, according to the NBS data.

On the contrary, the share of rebar output to the total crude steel decreased from 25% in 2019 to 22% in 2023.

The divergence between flat and long steel production would continue in the coming years, some market participants said, adding that the HRC capacity would also increase further.

This is because China's property sector has entered a long-term downward trend, and the country has been trying to promote its manufacturing as a new economic growth engine.

China's manufacturing sectors, especially cars, ships and new energy facilities, have played a larger role in offsetting most of the property's adverse impact on steel demand for 2023, according to market sources.

"The quick rising HRC capacity in a way has supported such improvement in manufacturing with ample and cheap steel supply ... But of course, to steel mills, the HRC capacity has been increasing too quickly that have undermined steel profit margins," one Shanghai-based source said.

According to some mill and trading sources in eastern China, the Chinese HRC sales profit margin was just around Yuan 50-100/mt ($6.9-$13.7/mt) in mid-September, but still better than rebar, which was still currently at a slight loss or breakeven level.

Given shrinking overseas demand, global supply chain restructure and stalled domestic household income, there is still a long way to go before China's manufacturing sector can achieve substantial improvement and push China's economy into a faster lane, industry sources said.

As a result, the HRC steel margins would likely continue to come under pressure in the foreseeable future on rising capacity, they said.