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China's steel inventories start to decline as downstream demand recovers

With the downstream demand for steel starting to recover in China, steel inventories have recently showed signs of decline after increasing for more than two months as the coronavirus outbreak has affected the country's industrial activities since January.

Data from the China Iron and Steel Association, or CISA, released March 23 showed that the market inventories of major finished steel products, including rebars, plates, wire rods, and hot- and cold-rolled coils, across 20 cities fell to 20 million tonnes in mid-March, from 21 million tonnes at the beginning of the month. This marked the first decline since the start of 2020.

Wang Guoqing, director of the Lange Steel Information Center in Beijing, said the drop in steel inventories shows the effect of production cuts announced by steelmakers in February and the recovering demand helped by the restart of industrial activities with improved transportation and higher operation rates across construction sites in China.

After the extended Chinese New Year holidays due to the coronavirus outbreak, steel inventories in China started piling up and climbed to the highest level in 10 years due to logistics disruptions and slumped demand for the material, analysts said. CISA data also shows that steel inventories at major steel mills stood at 21.4 million tonnes in early March, representing 47.6% growth year over year and a 98% increase from late January. Steel inventories held by traders surged 198.3% to 32 million tonnes in mid-March from early January, according to industry data provider Mysteel.

SNL Image

SNL Image

Despite slumped demand, the country’s crude steel output over the first two months of 2020 rose 3.1% year over year to 154.7 million tonnes with steel mills maintaining production, according to data from the National Bureau of Statistics. The bureau does not break out figures for January and February separately, but data from the World Steel Association released March 23 showed China’s crude steel production in January was up 1.4% at 79.9 million tonnes from the same period of last year, and increased by 5% year over year to 74.8 million tonnes in February.

As a result, Chinese steelmakers started cutting production as their profitability faced pressures amid the dampened downstream demand and to maintain domestic prices at a reasonable level amid the rising stockpiles. The CISA has also called for steelmakers to adjust production plans to keep it consistent with the demand, and mills across the country announced steel production cuts of 20% to 30% from March. In the steelmaking hub of Tangshan in Hebei province, a total of 28 steel companies announced production cuts in March, China Metallurgical News noted March 6.

On the other hand, steel producers are expected to see worse profit in the first quarter as demand fell sharply, Luo Tiejun, vice chairman of the CISA, said last month in an industry news conference. Last year, members of the CISA saw their profits drop 30.9% due to increased raw material prices and weak domestic steel prices. China's largest steelmaker China Baowu Steel Group Corp. Ltd. last month flagged a drop of up to 3 billion yuan for its profits for the first quarter due to disruptions from the coronavirus outbreak.

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Lange Steel Information Center's Wang expects demand to further recover in the second quarter, with more infrastructure construction speeding up. Amid a slowdown in China’s economic growth, the China Iron and Steel Association earlier estimated demand growth for steel from the construction sector to slow to 2% in 2020, compared with 8% in 2019.

Apart from traditional infrastructure spend by the Chinese government, Wang said "new infrastructure" is expected to improve steel demand this year, with China committing to investing more on the fifth-generation network, big data and artificial intelligence-backed technology to help spur the economy.

"The manufacturing of new energy vehicle charging piles and the construction of high-speed rails and intercity transit system will boost the demand for steel and consume the stockpiles built earlier this year," Wang added.

However, Lu Ting, a steel analyst with Shanghai Metals Market, said she believes it might take a few more months for the downstream sectors to consume the existing inventories, as the current inventory level equals the consumption of normally functioning downstream sectors of more than one month.

Lu also said the total investment in fixed-asset investments so far this year shows a decrease from 2019, and the steel industry has not seen signals of stronger demand.

“Industrial activity typically ramps up in March, but some of the firms still have no plan to purchase materials this year… and for some companies, workers still have problems with returning to work,” Lu added.

Although more policy support for the infrastructure sector is expected to help shore up demand with containment measures in China starting to be relaxed, Capital Economics' commodity analyst Kieran Clancy in a March 23 note said China's steel output will be weak for March with "a full return to normality still some way off."

The analyst also expected the prospects for global steel production to be bleak this year while the market is waiting for policy support in China to provide a boost to steel output, according to the note.