Contradictory views on China’s steel output. But only time will tell if production will rise or fall
Reports by the Australian government and other economic analysts that Chinese steel production has peaked are at odds with the expectations by local observers that the government’s infrastructure push will underpin demand
A new Australian government report predicting China’s steel production will peak this year and start to decline over the next two years is at odds with expectations in the mainland that output will actually increase because of the government’s renewed focus on infrastructure investments to stabilise economic growth.
Steel output in China, by far the world’s largest steel producer, is “forecast to peak” at 886 million tonnes this year, but will shrink over the period to 2020 to 842 million tonnes, according to a quarterly report on resources and energy released by Australia’s Department of Industry, Innovation and Science on Tuesday.
The department also estimated Chinese steel consumption would slump by 1.9 per cent in 2019 and 2.3 per cent in 2020 after increasing 2.8 per cent this year.
The report said the reversal of the mainland production trend will be driven by a series of government policies, including stricter environmental regulation, reforms that will shutter some loss-making production capacity, and reduction in debt at state-owned enterprises.
Canberra’s forecast matched predictions by other organisations.
This week, Morgan Stanley said China’s crude steel production would fall in the period to 2023, with Chinese iron ore demand peaking at 1.28 billion tonnes this year.
Last month, S&P Global Ratings also predicted a 2 per cent drop in mainland steel output next year. And in a report published in April, the World Steel Association said Chinese steel demand was expected to contract by 2 per cent in 2019, after stagnating this year. The organisation will update its forecasts this month.
However, some domestic observers see things differently.
“If the intensity of environmental regulation is the same as last year, steel production this autumn and winter is expected to be higher than the same period last year,” said Wang Guoqing, research director at Lange Steel Information Research Centre, a Beijing-based industry group, in a note released at the end of last month.
“The output restrictions have become normal and the steel market has adopted to them.”
The China Iron and Steel Association also flagged possible stronger steel output soon, since accelerating fixed asset investment in the steel industry over the first eight months of this year indicates new production capacity.
In the January-August period, investment in Chinese steel industry increased 14.8 per cent from the same period last year, accelerating from the 8.6 per cent growth in the first half of year and 3.4 per cent gain in the first quarter, according to a report by the association released last week.
It is clear that the domestic steel industry has thrived this year.
Even though the world’s largest steel exporter has pushed ahead with a national campaign to cut excess steel production capacity since early 2016, output is still climbing.
Over the first eight months of this year, Chinese steel mills produced 617 million tonnes of crude steel, a 9 per cent increase from the same period last year, with monthly output reaching a record high of 81.24 million tonnes in July.
Among the 29 major listed Chinese steel companies, 27 reported profits in the first half of the financial year, according to the Beijing-based The Economic Observer.
The debt-to-asset ratio of Chinese steel enterprises improved to 67.3 per cent at the end of June, nearly 4 percentage points lower than a year earlier, the China Iron and Steel Association said.
As a result, the US last month issued a blistering attack on the global forum created by G20 leaders in 2016 to work on reducing excess global steel production capacity, largely from China. The forum has not achieved its goal, the US said at the forum’s meeting in Paris, noting that China’s steel production alone equals the output from the rest of the world combined.
“This year is the most stable year for the Chinese steel industry since the global financial crisis in 2008,” said Liu Zhenjiang, president of the association, in a speech last month.
The steel association noted that Beijing’s call for greater infrastructure investment would underpin domestic demand for steel.
In a meeting last month, the State Council, China’s cabinet, vowed to stabilise the economy by, among other things, increasing investments in infrastructure projects that had previously been put on hold because of concerns over excess local government debt to finance them.
And at the end of September, the Ministry of Ecology and Environment removed blanket bans on industrial production in the Beijing-Tianjin-Hebei area during the winter heating season, and deleted targets of production limits for six major steelmaking cities, leading to the local expectation of higher steel output.
Still some analysts said that effects of the relaxation on production curbs remained to be seen.
“Removing targets is not equal to a significant easing of environmental policies, so cities with lower air quality will still have to significantly restrict production,” Ao Chong, an analyst for Citic Securities, wrote in a recent research note.
Wang from Lange Steel Information Research Centre noted that “environmental protection has become an important indicator for the government’s performance evaluation, so provinces and cities are expected to set strict production limit plans.”