China’s steel industry under pressure from failing property sector

Government stimulus and lower interest rates are designed to boost demand, but a recovery is not on the horizon.

As many of the world’s central banks, including the United States Federal Reserve, have been busy hiking interest rates in an effort to stall inflation, the People’s Bank of China has been doing the opposite. Around the time as the most recent rate cut, in late August, China’s State Council announced a much-anticipated $44 billion plan for spending and investments in infrastructure, doubling the funding already announced in June.

Something is going on in the Chinese economy and the upshot is being seen in China’s steel industry. The government’s stimulus package might have helped the Chinese steel sector and boosted the prices of steel and iron ore, but that hasn’t happened. Instead, steel futures dropped over 19% and iron ore futures declined by one-third between mid-June through the end of August, before ticking up in early to mid-September, demonstrating that traders lack confidence that the government’s stimulus policies are going to work to aid infrastructure and manufacturing.

As COVID lockdowns continued to weigh on the Chinese economy, some forecasters cut China’s GDP growth estimates for this year to 3%, down from 8.1% in 2021 and well below Beijing’s target of 5.5%. Worldsteel documented a 6.4% decline in steel production in China this year through the end of July and a report from S&P Global showed steel imports into China slowed by 65.2% during the first half of the year.

COVID and Steel

China’s zero-COVID policy has taken its toll on the Chinese economy, and state-sponsored stimulus may not be enough to galvanize a revival, at least in the short run. “It’s a question of whether the money is actually spent,” according to Al Munro at broker Marex, a UK-based financial services platform, in a note to traders.

China took less than two months to contain the original COVID-19 outbreak in 2020 and the Delta variant in 2021. But when Omicron hit this year, it took China three months—from early March to early June—to control the outbreak in Shanghai. This has exacted a toll on the Chinese economy and has come with a continuing price, as other cities and regions in China—such as Zhuozhou, an industrial city north of Beijing—were locked down even after Shanghai opened on June 1.

“Frequent COVID outbreaks, mass testing, and lockdowns,” said Munro, “are acting as a handbrake for the Chinese economy and will continue to do so.”

Data continue to show poor construction steel demand in China. Steel production in Tangshan, a manufacturing center in Hebei province, will fall by nearly 11% in the second half of this year compared to the first half, according to Minmetals Futures, a Chinese state brokerage headquartered in Shenzhen. Atradius, the trade credit insurance concern, expects steel demand in China to decrease 0.7% in 2022.

Housing Sector

China’s appetite for steel has long been driven by the housing sector, which accounts for one-third of China’s steel consumption. “New property development in China has been on a downward trend for the past few years and is expected to remain so in 2022,” according to a report from S&P Global Commodity Insights. “The main reasons behind slowed sales include stalled population growth, near complete urbanization, and stagnant household income due to the pandemic resurgence.”

Urbanization has driven China’s property development and steel consumption over the past 20 years. Sixty-four percent of the Chinese population moved to metropolitan areas by 2020, according to S&P Global, and experts say that urbanization slows down after that number reaches 60%.

China’s property sales trended lower in August, down 31% year over year, following a 16% decline in July, according to data from the China Real Estate Information Corporation. The same data showed that floor space of China’s home sales in 30 major cities dropped 13% month over month in August.

Longfor Group, a Chinese property developer, projected in late August that the value of China’s new home sales in 2022 would drop by 30% year on year. Between January and July, the value of new home sales dropped 29% year over year, according to China’s National Bureau of Statistics.

On top of all that, a mortgage strike is spreading across China, with homebuyers withholding payments on loans across hundreds of residential projects throughout the country. Because property developers in China tend to sell residences before development has been completed, some developers won’t have the funds to complete their projects as a result.

4^th Quarter Rebound?

Some observers are looking for some form of resurgence in China’s steel production during the fourth quarter, but the housing sector probably won’t be contributing to any such revival. The uptick in iron and steel futures prices in early September likely came as a reaction to developments in the automotive sector.

“Metals and steel demand from automotive has started to increase again as the car industry has rebounded from several lockdowns and vehicle sales are supported by government initiatives,” “However, this surge in demand…cannot compensate losses from the construction decline.”

The same is confirmed by the state-owned, Shanghai-based Baosteel, which announced on August 31 that China’s steel demand would begin to recover during the fourth quarter, but that “steel demand would remain under pressure” as the property sector remained “in a deep adjustment.”

The steel sector could benefit further if China’s economy started to respond to the government stimulus and homebuyers were motivated by lower interest rates, but that probably won’t happen this year. “The downturn in China’s debt-strapped property sector,” concluded the S&P Global Commodity Insights report, “is unlikely to be reversed at least within 2022.” In the longer term, it’s worth noting, home construction will still face secular economic headwinds from completed urbanization and low population growth.

Should the property sector show signs of life sooner rather than later, the steel industry won’t benefit immediately. “Even if new home sales begin to increase in the fourth quarter,” said the S&P Global report, “developers will divert most of the money on securing project completions.”