Macroeconomics: China’s 2019 steel production to peak at 1Bnt?

Based on World Steel Association (WSA) preliminary numbers and Roskill’s model, global crude steel production totalled 1,871Mt in 2019, a 3% increase year-on-year. This increase, however, hides a large discrepancy between China and the rest of the world. During the period under review, China’s crude steel production grew by 7.3% year-on-year while the world excluding China posted a 1.5% year-on-year decline. The drop was across the board as a slowing global economy, trade issues and geopolitics impacted steel consumption and, therefore, production.

After having increased by 11.6% year-on-year in 2018 to 928Mt, China’s steel production rose again in 2019 to reach 996Mt, a whisker short of the 1Bnt mark. Considering the Chinese government’s repeated commitments to restructure the steel industry and to eliminate overcapacity, repeated production records are difficult to understand. Between 2016 and 2018, China shut down about 290Mtpy of capacity from ‘older’ facilities. It is widely assumed that these facilities were operating at very low levels, if not idled.

Chinese authorities have also authorised the building of new steel facilities provided that they replace old ones on a same tonnage basis. In 2019, it was reported that about 50Mtpy of new capacity has been commissioned. However, it also appeared that around 35Mtpy of old (to be replaced) capacity, although earmarked for 2019, was already shut down, meaning that only 15Mtpy capacity was effectively closed in 2019. As a result, the net capacity increase for the year was approximately 35Mtpy. Additional supply came from plants commissioned in 2018 ramping up in 2019. In 2020, around 90Mtpy new capacity should be commissioned although it is believed that the equivalent amount will be shut down, translating into no new net capacity increase, at least theoretically.

To add an additional layer of complexity, new furnaces are more efficient than older ones, translating into higher utilisation rates. On the top of this, the use of more scrap and/or higher-grade iron ore has also allowed mills to produce at higher utilisation rates. Assuming that China’s steel production capacity peaks at 1.2Bntpy an 80-90% utilisation rate is possible, translating into a theoretical peak production ranging 960-1,080Mtpy. Roskill forecasts that Chinese steel production will peak at 1,040Mt in 2022.

As the Chinese economy may slide below the 6% GDP mark, the country’s authorities are likely to keep infrastructure spending at a high level, while the property market will stabilise, at least in Tier 1 cities. Overall, a maturing Chinese economy will become less steel intensive and demand will level off. As the symbolic 1Bnt mark is about to be broken, Roskill also believes that the Chinese authorities may scrutinise, more attentively, the future developments of the country’s steel industry.

Steel analysts have been forecasting for some time that China’s steel production will peak at 1Bnt. Forecasting the exact peak production tonnage and timing is nearly impossible considering all the unknown parameters mentioned above. Roskill believes that we are getting closer, but we are not there just yet.

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