Singapore — China's domestic steel market will continue to face downward pressure in the second quarter due to high steel production, soaring steel inventories, depressed exports and lackluster demand in the manufacturing sector.
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Infrastructure construction has recovered quickly so far in Q2, but the property sector may see new starts drop significantly in 2020 and thus be unable to generate much incremental steel demand.
Liquidity challenges at steel traders and mills have eased recently, partly due to end-user demand recovery and partly because of China's loosening monetary policies.
According to the People's Bank of China, short-term corporate loans and corporate bonds issued in Q1 surged 119% and 91% year on year respectively. More than sufficient short-term liquidity has enabled steel mills to keep production levels high, even though a large dollop of mill and trader cash is tied up in soaring steel inventories.
As a result, Chinese steel prices could fall in Q2 due to oversupply, but are unlikely to collapse due to significantly improved market liquidity. Prices fluctuating downwards is probably the most likely scenario in Q2.
S&P Global Platts analysis shows China's pig iron and crude steel production in April is likely to dip 1.9% and 0.6% on a year-on-year basis, respectively, but still increase from March, to 68.5 million mt and 84.5 million mt.
In addition to the relatively high steel production, China's soaring steel inventories will continue to weigh on prices. Platts estimated China's finished and semi-finished steel inventories hit 100 million mt at end March, three times higher than a year earlier. The surge was attributed to domestic demand destruction as the country was in lockdown for much of the quarter due to the coronavirus pandemic, but its steel production remained high.
China's crude steel output rose 1.2% on year in Q1, while the floor space of property new starts fell 27.2% over the same period, National Bureau of Statistics data showed. Fixed asset investment in infrastructure and manufacturing slumped 19.7% and 25.2% on year, respectively.
Steel inventories have declined in April, but remained abnormally high mid-month, indicating end-user demand has not been strong enough to solve the oversupply problem, market sources said.
Rebar has witnessed the strongest demand among steel products. Even so, rebar inventories held by traders in Hangzhou – one of the most active domestic trading hubs – were still 75% higher than a year ago, but down 8% from their peak in mid-March, Platts estimates.
Exporting is no longer a route to easing domestic oversupply as overseas demand is even worse.
Some export traders said China's monthly steel exports might drop to around 3 million-4 million mt in May and June from 6.476 million mt in March. Meanwhile, China's steel imports are likely to rise by 500,000-1 million mt/month in May and June from 1.137 million mt in March. The imports mainly comprise slab, billet, plate and some hot-rolled coil.
As long as the coronavirus pandemic continues to rage around the globe, China's manufacturing is unlikely to reach full capacity, and therefore demand for most flat steel products will remain depressed in Q2 and even in the second half of 2020, according to some market sources.
Power generation, a proxy for China's manufacturing activity, had recovered by late March to around 80%-90% of what it was a year earlier, Platts estimates using thermal coal consumption data at major power generation companies provided by Chinese data provider WIND. However, it has shown no further improvement since then.
The key problem for China's manufacturing is insufficient demand. This is partly due to disrupted global demand and supply chains, and partly because China's citizens are still avoiding gathering and travelling, fearful of the virus spreading again. Unemployment and decreased household income in China, in tandem with the economic slowdown, have hit consumption as well.
Government stimulus policies, such as injecting liquidity, reducing taxes and fees and lowering company financing costs, have so far focused on boosting production rather than consumption, and are therefore unlikely to solve the underlining problem for manufacturing. This is partly because consumption cannot be boosted efficiently if people avoid gathering or travelling in large numbers.
Insufficient demand in manufacturing is likely to persist into H2 and is unlikely to end until there is a vaccine, some market sources said.
The passenger vehicle sector has been hit particularly hard, as it has been grappling with overcapacity since 2018. Some automakers in southwest Chongqing trimmed production by 30% in March, but their car inventories are still rising, market sources said.
Steel demand from wind power, shipbuilding and steel structure manufacturing has been strong since March, boosting demand for heavy plate. But the three sectors account for just 6% of China's total steel consumption.
As of mid-April, 90%-100% of construction sites across China's west, east and south had resumed operations, while those in central Hubei province and northern capital Beijing and surrounding areas are taking longer to get back to normal.
Sources in east and south China said demand for construction steel had almost returned to the level of Q2 last year, but strong supply and high inventories were weighing on prices.
The property sector is under a significant downward pressure in 2020 and it remains unclear how far government stimulus to infrastructure will reach. Property accounts for about 25% of China's total steel consumption, while infrastructure accounts for about 20%.
China's central government is determined not to use property as a short-term stimulus, and the property sector was already on a downtrend after booming for almost 10 years. Chinese consumers are already highly leveraged, while some major property developers are hampered by high debt.
According to S&P Global Ratings, rated developers in China will have $27 billion offshore bonds maturity and $60 billion domestic bonds maturity in 2020 and face "an unprecedented refinancing challenge" this year.
Chinese local governments will almost certainly loosen restrictions on home buying and support developer financing, as long as property prices do not surge.
However, some market sources expect Chinese property developers to make every effort to speed up their sales and accelerate construction on already started projects in order to reduce their debt burden. It is unlikely there will be another round of massive investment in the property sector and therefore property new starts, the biggest steel demand driver in China, will decline, they said.
China is expected to set economic goals and announce more detailed stimulus policies during the National Congress and political consultative conference. Both usually take place in March, but were postponed due to the coronavirus outbreak and are now expected to be held in late April or May.
Some market sources believe that more stimulus will be injected into urban infrastructure projects later this year through measures such as issuing government bonds and increasing the fiscal deficit. This is because maintaining employment is the top priority for the Chinese government in 2020, and boosting infrastructure is the most efficient way to boost it.
As a result, China is likely to see better steel demand in Q3 and Q4 than in Q2 due to the speed-up of infrastructure development.
China's crude steel and pig iron production