Will Beijing take stimulus measures to boost economy for maintaining growth ?
By Kunal Bose
WorldSteel in its latest short-term global outlook report says about China: “The outlook for 2024 is uncertain. The real estate market and exports will continue to exert negative pressure on steel demand and it might contract in the absence of additional government support measures.” Steelmakers in the country will be under incessant pressure to take a close hard look at production volume and new capacity commissioning as continuing weakness in construction activity, particularly building of new houses and rekindling of trade frictions resulting from very high exports are starkly evident.
Analysts have flagged concern about steel demand based on reports Chinese investment in real estate sector is likely to skid 6 per cent in 2024. Not only that real estate sale will continue to fall along with squeeze in new project startups, according to China Real Estate Association. All bad omen for the steel industry.
How much steel did China use in recent times, particularly since the second half of 2022, when from the depression in the property market started weighing heavily on the economy? China Metallurgical Industry Planning and Research Institute told the Press recently that the country's demand for steel fell by 3.3 per cent in 2023 from the previous year to 890m tonnes and there would be a further domestic steel use contraction of 1.7 per cent in 2024. For any overall demand shrinkage, the villain of the piece as said earlier is the property sector where most players are badly stuck with debts and much of that may turn into non-performing assets in a domino effect for banks. Real estate sector was also stressed by tight mortgage lending terms.
Beijing, therefore, was constrained to cut the down payment ratio both for first time buyers and for acquirers of second houses in mid-December in an attempt to improve market sentiment. This, however, did not happen to the expected extent. As the property sector reels under several negative developments, that will translate into a further 4 per cent contraction of construction steel use in 2024 following a 4.8 per cent decline to 506m tonnes in 2023. Real estate and infrastructure together account for around two-thirds of steel demand in China.
Improvement in property sector outlook will be linked to overall better economic performance, deep reforms and weeding out of irregular practices and close bank scrutiny before sanctioning of credit lines to real estate developers. In the meantime, analysts are trying to find out to what extent any rise in steel demand from the infrastructure sector will compensate for the use decline in the real estate sector. That Beijing will attempt a 5 per cent GDP growth in the current year on a base expanded in 2023 is made abundantly clear by prime minister Li Qiang at the recently held annual National People's Congress. Li's message has an important bearing on near-term steel demand as it will address the challenge to defuse risks emanating from bankrupt property developers and bankrupt cities and correct structural imbalances of the economy.
Steelmakers will, however, be eagerly awaiting the stimulus package boosting investment in infrastructure development. What will particularly aid infra development and in the process steel demand are the plans to issue 1 trillion yuan ($139 billion) in special ultra-long term treasury bonds. At the same time, the 2024 special bond issuance quota for local governments was set at 3.9 trillion yuan, against 3.8 trillion yuan in 2023. Manufacturing sector where the purchasing managers' index (PMI) continues to stay below 50 (a reading below 50 points to contraction) is a call for policy support.
The importance of the sector for steelmakers in underlined by it accounting for around a quarter of the metal demand. In that space, automobiles having a share of shades less than 10 per cent of steel demand features prominently. Encouragingly for steelmakers, production and sales of automobiles in China both recorded double digit rises in 2023 capping over 30m units. Pointing out that 2023 saw China exporting a record 4.91m vehicles in 2023 (a 57.9 per cent jump on year), analysts say in the process considerable volumes of steel found their way out of the country. The observation is buttressed by China Iron and Steel Association (CISA) pointing out that up to 60 per cent weight of a typical car is made of steel and a further 12 to 15 per cent constitutes cast iron.
Use of steel along with other metals such as aluminium and copper in the automobile space will rise further in 2024 as China Association of Automobile Manufacturers (CAAM) is anticipating auto sales to rise by over 3 per cent on year on year to top 31m units. Exports, according to CAAM, will grow to 5.5m units. In China's manufacturing universe, automobile does not have the burden of killing overcapacity unlike in many other areas, which Li wants to be curbed. At the same time, he favours allocation of more resources for technology innovation and new advanced manufacturing systems.
All this will be in line with President Xi Jinping's promotion of “new productive forces.” Steel, specially the new capacity replacing the old, is part of the campaign. When many foreign multinationals, based particularly in the US, Japan and South Korea are shifting some manufacturing capacity from China to mainly south and south-east Asian countries, Li significantly has promised to lift all foreign investment restrictions in the manufacturing sector. Whatever worth that promise maybe, foreign investment in steel has stayed particularly shy in China, which remains the second most important destination for foreign direct investment (FDI) after the US.
Notwithstanding high capacity overhang and demand fall compelling exports (fetching better prices than in domestic market) that invited dismay and criticism in importing nations, the country's steel industry, according to China National Bureau of Statistics, managed to earn profits of RMB 56.5bn ($7.95bn) last year, a jump of 157.3 per cent over 2022, benefiting from a low base. What is to be noted is that more than half of 2023 profits were made in the final two months. A common concern of analysts is that in spite of surplus global capacity and the industry smarting under demand fall, capacity growth is happening in many parts of the world, including the two leading producers China and India.
Take China for instance, where the official capacity swap mechanism if followed in letter and spirit will result in net lower new capacity than the old capacity being replaced. According to S&P Global calculations, after offsetting for the capacity shut during 2017-19, new facilities would “lead to a net increase of 11m tonne of pig iron and 14m tonne of crude steel capacity” mainly in 2023 with some likely spill over in 2024. S&P further says: “China's pig iron and crude steel capacity are likely to decline slowly from around 2025, as most of the long-closed facilities will have been replaced by 2023 or 2024, and new capacity on stream in 2025 will be replacing facilities still in operation.” World steel capacity increase of 57m tonnes in 2023 was the highest in a decade and that rise is equivalent to the capacity in existence in a couple of major steelmaking economies such as Germany and Brazil. Africa, ASEAN and the Middle East saw significant capacity growth last year. (IPA Service)
