The ongoing decline in steel rebar prices globally points to underlying issues within the construction industry internationally. Key factors behind the price decrease include unbalanced supply and demand and a slowdown in China’s economic growth. China is the largest producer and consumer of steel worldwide, playing a critical role in the commodity’s global markets.
Currently, the country’s steel industry is experiencing overproduction and over-exporting. China’s internal demand for steel has significantly decreased due to its real estate market crash, which started in 2021. According to the Commonwealth Bank, the volume of new construction starts in China decreased by 24% from the end of 2023 to the present day. This followed declines of more than a fifth in each of 2023 and 2022. It’s unlikely the domestic demand for construction steel will recover before the end of 2024, as the property market’s downturn is far from over.
The Chinese government has been unsuccessful in stabilizing the steel industry despite producers curbing their output. Lower steel production has also affected other commodities like iron ore, for which demand fell nearly 10% in one week during mid-August. Recently, China Baowu Steel Group Corp.’s Chairman Hu Wangming warned that the Chinese steel sector should expect a “harsh winter,” a worse downturn than the industry faced in 2008 and 2015. This decline will be “longer, colder and more difficult to endure than we expected.”
According to a forecast by analysts at Kallanish Commodities Ltd., the Chinese construction industry’s demand for steel will further decrease by 10% throughout 2024. Historical data for the previous 20 years indicates this will reduce the sector’s share to about a fourth of its long-term average consumption. “Steel demand is really poor … with highly indebted provinces focusing on deleveraging. There’s a lack of good (construction) projects and infrastructure spending is less than ideal,” stated Wei Ying, an analyst with China Industrial Futures Ltd.
To rebalance the market, Chinese steelmakers have reduced their output. Despite these efforts, the steel sector remains too large and needs to eliminate more than 30% of steel manufacturing capacity to overcome present challenges. Wu Wenzhang, the founder of consulting company Shanghai Steel Home E-Commerce Co., believes that a further “steady decline” is likely as “China’s steel demand has already peaked.” He predicts that “it will be very difficult for steel to get out of this cycle over the next two to three years unless there’s a strong push from the government for mergers and restructuring among steel companies.”
This year, steel inventory sitting in ports has increased monthly, now exceeding 150 million tons, as Chinese producers have been looking to international markets for more sales. In the first half of 2024, the country’s exports surpassed the volumes seen in the previous eight years. However, other countries have resisted these efforts by imposing tariffs to safeguard their steel industries.
China’s recent attempts to grow steel exports has resulted in serious pushback from countries in Latin America especially. Vietnam, the largest buyer of Chinese steel, is considering import restrictions. In addition to Latin America and some countries in Asia, the U.S. and Europe are experiencing the impact of more aggressive exports from China. ArcelorMittal SA claims that China’s exports destabilize the global steel market by driving down U.S. and European prices.
Analysts at Goldman Sachs expect China’s excessive exports to reverse in the coming years, as producers’ recent drastic decreases in output are helping restore the balance between supply and demand. However, an increase in domestic steel consumption in China seems unlikely without new government stimulus for the country’s construction sector and for the overall economy.
The Chinese steel market will face considerable obstacles in the long term, especially if the government fails to implement stimulus packages or strategic reorganizations. Global prices and steel demand will likely continue to decrease due to low domestic consumption by the country’s real estate sector and aggressive moves to ship steel abroad. The ongoing steel industry slump and continuing property market decline point to another challenging year for China’s economy.
Dmytro Konovalov has over 10 years of experience in equity research and analysis for global markets at leading international financial institutions.
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