For all those stubbornly optimistic investors, analysts and company executives still looking for a solid year for the huge (and usually hungry) Chinese steel industry – think again.
In fact there’s more bad news for iron ore exporters from Australia and Brazil with the world’s major steel industry group forecast no growth in demand the huge Chinese industry in 2022.
On top of this week’s 30% production cut for the winter heating season in many steel producing cities in Northern China from November 15 to March 15 (which extends 2021’s cuts into 2022), the World Steel Association (WSA) sees no rise in demand next year in the world’s biggest steel market.
“From a high base last year and with a continued negative trend in the real estate sector, Chinese steel demand will have negative growth for the rest of 2021,” the WSA forecast in its 2021 and 2022 demand outlook.
(The WSA demand outlook is the basis for nearly all estimates of global steel production and iron ore demand each year).
“No growth in steel demand is expected in 2022, with the real estate sector remaining depressed in line with the government policy stance on rebalancing and environmental protection,” the WSA said in its short range forecast.
The impact on iron ore suppliers will be varied – BHP, Vale, Rio Tinto and Fortescue will all survive and will be probably to look at a new round of cost cuts.
Some of Fortescue’s recent expansion plans look problematic but for smaller, more marginal suppliers in Australia especially the future looks glum. It is hard to see the four small mines that have closed in the past month coming back at this stage.
The lack of any demand in China is why the WSA sees growth in global steel demand slowing sharply in 2022 to just 41 million tonnes from 2021.
Steel demand forecast to grow 4.5% this year to reach 1.855.4 million tonnes after the Covid-impacted 0.1% growth in 2020, but it is forecast to slow to growth of just 2.2% next year to 1.896.4 million tonnes.
“The current forecast assumes that, with the progress of vaccinations across the world, the spread of variants of the COVID virus will be less damaging and disruptive than seen in previous waves,” the WSA said.
The forecast was prepared before the full extent of the power blackouts, rationing and plant closures across more than 20 Chinese provinces in late September and into early October as the country battles a looming shortage of fuel for the coming winter.
It’s been an annual scramble in China at this time of year for the past few years to secure enough energy supplies to see the country through the winter but this year, the global shortage of energy – gas and coal especially – has added to the woes for China, driving prices higher and higher.
This has seen thermal coal prices more than double in a year, LNG prices triple or more while coking coal prices are up threefold for some grades of higher quality coal in Chinese and northern Asian markets.
China is desperately trying to boost coal output (and lifting carbon emissions) and trying to buy more LNG and diesel to provide reserves for power generation in the heating season.
Car sales fell nearly 20% in September after a 17.8% slide in August – the reason here is the continuing shortage of computer chips.
Car sales for the January-June period are still up more than 8% but a few months ago the growth was more than 20% from a year earlier. While sales of New Energy vehicles more than doubled, the fall in sales of conventionally powered cars means lower demand for steel from one of the most important end using sectors
All this means the growth in demand will be outside China – in the US, Europe and elsewhere in Asia.
The extension of the 30% cut ordered for steel mills in 28 northern Chinese cities in the winter heating season means Chinese production next year will probably be lower than 2021 and possibly lower than 2020’s record 1.065 billion tonnes.
That in turn means iron ore exporters this year will fall short of 2020’s record 1.17 billion tonnes (they were down 3.6% in the first 9 months of this year) and 2022’s volume will be even lower.
The full impact of these problems (cuts) on the already weakening levels of demand for steel are now starting to emerge.
Explaining its forecast, the WSA said that while the Chinese economy sustained its strong recovery momentum from 2020 into the early part of 202, “it has slowed since June. There have been marked signs of deceleration in the steel using sector’s activity since July, leading to a steel demand contraction of -13.3% in July and then -18.3% in August.”
The slowdown is “partly attributable to occasional factors such as the recent adverse weather (floods in some major provinces in the past three months) and small waves of infections through this summer, however more substantive causes include the slowing momentum in the real estate sector and the government cap on steel production.”
The WSA points out (as we have seen with the struggles by the heavily indebted China Evergrande to remain afloat) that real estate activity has weakened due to tough government measures on developers’ financing introduced in 2020.
Infrastructure investment has not picked up in 2021 “ ue to a depletion of investment opportunities and limited local government financing ability and the strong manufacturing recovery across the world has reduced the export market (as has tax changes on Chinese steel exports as a means of cutting output),” the WSA said.
“While the January to August apparent steel use still stands at a positive 2.7%, overall steel demand is expected to decline by -1.0% in 2021.
“Some restocking activities might support apparent steel use. Recent government action to push for a transition away from the real estate-dependent growth model is likely to continue“ the WSA said.
Overhanging all of this is the problems in property and especially China Evergrande’s $US305 billion in debt (of all kinds). The Chinese government seems to be trying to manage its slow death without damaging the economy and financial system.
From what the country’s central bank has said, there are mechanisms in place to protect banks and home buyers if the problem worsens, but from what has not been said about companies, it seems they are on their own.
Reuters reported on Thursday that “Chinese leaders, fearful that a persistent property bubble could undermine the country’s long-term ascent, are likely to maintain tough curbs on the sector even as the economy slows, but could soften some tactics as needed.”
“President Xi Jinping looks determined to press ahead with the latest round of property tightening even if it adds to near-term pain, in contrast to previous campaigns which tended to be watered down when economic growth began to falter.
“Xi’s resolve stems from a longer-term structural push to reduce the economy’s reliance on property and debt and channel more resources into high-tech manufacturing and other emerging sectors to drive growth.
“Despite rapid expansion of other industries in recent years, the property sector, along with related sectors such as construction, still accounts for more than a quarter of China’s gross domestic product (GDP),” Reuters pointed out.
That will be confirmed in next week’s September quarter GDP update and separate data on the pace of business investment.
This is why the health of the property sector will be driving Chinese steel output (and consumption) well into 2023 – which in turn means continuing weak demand for iron ore and weak pricing.
The International Steel Association’s glum forecast for 2022 Chinese steel demand is a recognition of the changes happening in the country’s economic and social policies – and the arrival of the realities of climate change and cuts to carbon emissions.
To think otherwise is to resemble an ostrich.
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And though it didn’t blame the slowdown in China, Rio Tinto on Friday revealed a small trim in its 2021 iron ore guidance.
Rio Tinto said it now expects full-year Pilbara iron ore shipments to be in the range of 320 million tons to 325 million tonnes, down slightly from the previous guidance for the shipments to be at the “low end” of 325 million tons to 340 million tons.
The forecast has been cut back because of “modest delays” to completion of the company’s new greenfield mine at Gudai-Darri and its Robe Valley brownfield mine replacement project amid tight labour market conditions in Western Australia, it said in its September quarterly report on Friday morning.
Pilbara iron ore shipments came in at 83.4 million tonnes in the September, which is 9% higher than in the prior quarter and up 2% from a year ago.
