China’s steel sector woes to continue amid domestic demand slump

Analysts see few catalysts for a turnaround in China’s steel industry

PUBLISHED : Friday, 11 December, 2015, 3:15pm
UPDATED : Friday, 11 December, 2015, 3:15pm

The outlook for China’s overcrowded steel industry will remain negative in the near term, as the sector is struggling with sluggish demand and excess inventory on the back of a sharp economic slowdown in China, analysts say.

In addition, potential anti-dumping investigations against China’s steel exports could also pose a key risk to the sector.

Steel output has declined this year alongside the dramatic fall in domestic demand.

According to China’s Iron & Steel Association (CISA) earlier this week, China’s daily crude steel output from 97 large and medium sized mills fell to 617 million tonnes per annum as of mid-November, down 2.1 per cent from early November levels.

Nationwide, CISA estimates that the daily production rate fell 1.6 per cent from early November level.

“At this run rate, we estimate steel demand fell 5.5 per cent for the first eleven months of this year,” said analysts from JP Morgan in a recent research report.

Meanwhile, China’s steel Purchasing Managers’ Index (PMI), another indicator of steel manufacturing activity, dropped to a seven-year low of 37 per cent in November, according to the China Steel Logistics Professional Committee. The steel PMI has been running below 50 per cent for 19 consecutive months. A print above 50 indicates an expansion in the sector, while a reading below 50 points to a contraction.

However, on the supply side, the inventories saw no sign of a significant cutback.

In late November, steel mill inventories rose 1.1 per cent to 15.2 million tonnes, compared with 15 million tonnes in late October, while steel stockpiles with traders dropped 2.4 per cent to 9 million tonnes versus 9.2 million tonnes in early November. Taken together, the estimated inventory level is 13.5 days in late November, still slightly up from 13.4 days in early November, according to JP Morgan.

On the raw materials front, iron ore stocks at Chinese ports climbed 4 per cent to 89.5 million tonnes, up from 86.1 million tonnes in early November. Iron ore stocks at steel mills were broadly flat at 19.7 days in early November.

The steel sector is still under heavy pressure from “worsening supply-demand dynamics”, said Yang Luo, an analyst from UBS, in a research note.

The sluggish demand at home and large excess capacity have already prompted Chinese steel mills to dump steel abroad at low prices.

China’s total steel exports jumped 22 per cent in the first 11 months of the year to 101.7 million tonnes, official data showed Tuesday.

What’s more, China’s Ministry of Finance said on Wednesday that it will cut export tariffs on steel billet and pig iron to 20 per cent from 25 per cent, starting next year.

China’s steel export growth could “mildly revive in the short term”, UBS estimated.

However, the gap between supply and demand may still not get better, analysts said.

“We would expect supply-demand dynamics in China to worsen over the long term,” Luo from UBS noted.

There is “[no] significant capacity shutdown” either through administrative measures or stricter environmental regulations, Luo said. He added that he hasn’t seen “substantial improvement” in market concentration stemming from industry consolidation.

He added that key risks included a hard landing of China’s economy and potential anti-dumping investigations against Chinese steel exports.

“We remain negative on the sector,” Luo said.

JP Morgan also expected the near term outlook to remain “challenging”, as the first-quarter approaches, which is typically a low season for steel demand.

Among steel producers, UBS maintained a “sell” rating on Maanshan Steel, one of China’s largest steel makers listed in Hong Kong and Shanghai. UBS said they were advising investors to steer clear of the stock because of “a sluggish demand outlook and the company’s cost disadvantages versus peers.”