China steel mill profits improve in Q2, but margins weaken in off-season

Profitability in China's steel industry improved in the second quarter from the first quarter, but weaker demand and growing steel inventories have eroded steel mill margins since mid- to late June, raising concerns over the sector's outlook for the second half of the year.

China's ferrous smelting and processing sector posted a total profit of 31.77 billion yuan ($4.69 billion) in January-June, down 25% year over year, National Bureau of Statistics data released July 27 showed.

Based on NBS data for the first quarter of 2026, the sector generated aggregate profits of 35.11 billion yuan in the second quarter, a significant turnaround from a 3.34 billion yuan loss in the first quarter. However, second-quarter profits were still 2.7% lower than a year earlier.

Despite the quarterly improvement, several mill sources, traders and a steel industry analyst said mill profitability has declined since mid- to late June as steel demand weakened during the seasonal downturn, but steel output cuts remained too modest.

"As of late July, domestic hot-rolled coil sales among mills have generally fallen into losses of around Yuan 50-100/metric ton," a mill source said.

Another mill source and a trader said domestic rebar sales are also losing around 50 yuan/mt at present.

Under pressure from weakening seasonal demand and rising losses, Chinese steelmakers have stepped up production cuts since mid-July.

Daily pig iron and crude steel output at China Iron and Steel Association member mills averaged 1.841 million mt and 2.015 million mt, respectively, over July 11-20, down 1.3% and 0.4% from early July, and 5.3% and 5.9% lower than a year ago, CISA data released July 25 showed.

Over July 1-20, daily pig iron and crude steel production averaged 1.853 million mt and 2.019 million mt, respectively, down 2.3% and 2.4% from June averages. Output was also 4.4% and 4.7% lower year over year.

However, the production cuts have so far failed to prevent further inventory accumulation.

Finished steel inventories held by mills and major spot markets monitored by CISA climbed to 27.75 million mt as of July 20, up 8.3% from the end of June and 18.5% higher than a year earlier.

Inventories of hot-rolled coil and rebar reached 2.25 million mt and 4.09 million mt, respectively, as of July 20, about 26.4% and 35% higher year over year.

"Although steelmakers have stepped up production cuts, demand is falling even faster, leaving steel inventories elevated," a mill source said. "As a result, steel prices and mill profitability are unlikely to improve in the foreseeable future."

Another mill source said recent declines in coke prices had helped prevent steelmaking losses from widening further.

"Current losses remain within a tolerable range for most mills," the source said. "Given the weak domestic steel demand, the decline in steel output during July has still been too limited to reduce inventories or support a meaningful rise in steel prices."

Steel market participants are closely watching a Communist Party Politburo meeting expected at the end of July, which traditionally focuses on economic policy.

The two mill sources said that if the meeting fails to announce new stimulus measures aimed at boosting domestic consumption or supporting traditional steel-consuming sectors such as property and infrastructure, steel demand is unlikely to see a meaningful recovery in the second half of the year, and that the steel prices are likely to continue dragging on at low levels.

Platts, part of S&P Global Energy, assessed domestic HRC at 3,320 yuan/mt ($490/mt) and rebar at 3,060 yuan/mt on July 16, down 30 yuan/mt and flat, respectively, from end-June levels.