China's CY23 outlook: Crude steel production may dip 10 mnt, consumption to inch up

In 2023, demand will dominate price trends of steel products in China. With the government's macro focus having shifted to increasing domestic demand, steel demand may improve marginally in 2023, although supply will drop slightly. Prices will fluctuate throughout the year.

As far as end-user industries are concerned, real estate is still recovering, but front-end sales and completion of back-end construction may increase. Infrastructure investment, adopted as the main focus for stimulating steady growth, will continue to maintain a medium-to-high growth trend. The manufacturing industry will likely show both domestic and export growth. It is expected that the overall situation will remain relatively stable.

Real estate:?In real estate, the focus has shifted from addressing the challenges of the demand side to the supply side. The Central Economic Work Conference, which ended mid-December 2022, stressed on housing sector improvement, and emphasized that housing concerns, people's livelihood, stability, and effective prevention and resolution of risks in top real estate companies should be priorities.

Later, the Central Finance Office mentioned in an interview that the country must fully understand the importance of the real estate industry and its potential. Therefore, it is expected that in 2023, further easing of real estate policies in terms of both supply and demand can be expected. In the latter half of the year, a rebound can be expected and the decline in real estate steel demand may narrow to 4-5% in 2023.

Infrastructure:?Infrastructure investment in 2023 may continue to maintain a medium-to-high growth rate, but this may slow down compared to 2022. The Central Economic Work Conference clearly stated that the fiscal policy should be strengthened to improve efficiency and maintain the necessary fiscal expenditure intensity. Therefore, it is expected that the fiscal deficit ratio will increase slightly in 2023.

On the other hand, stock projects started in 2022 will continue into the first half of 2023. As per data, the y-o-y growth rate in new orders signed by the five largest construction companies will remain at 20% in the first three quarters of 2022. However, it should be noted that the current slump in the real estate industry continues, which will lead to a continued downtrend in land transfer revenues in 2023, thereby suppressing the growth space for infrastructure investment. Considering these factors, the growth in infrastructure investment in 2023 will be 7-8%, which will drive up growth of steel demand by about 5%.

Manufacturing:?In 2023, domestic manufacturing investment is seen declining. On the one hand, the profit growth of industrial enterprises has slowed down since March, and turned negative after July. On the other hand, because of global economic recession, exports are likely to decline. From October to November 2022, domestic exports experienced negative growth for two consecutive months. However, there are still some positive factors for the manufacturing industry in 2023, the most important of which is the support at the policy level.

Therefore, it is estimated that the growth rate of manufacturing investment in 2023 may be between 4-5%, and push up steel demand by 2-3%.

Thus, based on the end-user industry growth analysis, it is expected that overall steel consumption in 2023 will increase slightly y-o-y by about 0.15%.

Supply-side issues:

The report of the 20th National Congress of the Communist Party of China clearly proposed to actively and steadily promote carbon peaking and carbon neutrality. China Iron and Steel Association stated that capacity management and mergers and reorganizations are the two key measures to stabilize the industry.

The reduction and replacement of steel production capacity has been steadily advancing. According to provisional statistics, in the capacity replacement plan released in the first 10 months of 2022, around 50.42 million tonnes (mnt) of new ironmaking capacity and 35.84 mnt of steelmaking capacity were involved. Around 50.60 mnt of ironmaking capacity and 51.14 mnt of steelmaking capacity were involved in the elimination of ironmaking capacity. Among them, 9.61 mnt of iron-making capacity and 10.97 mnt of steel-making capacity will be put into operation in 2023. Around 14.08 mnt of iron-making capacity and 14.479 mnt of steel-making capacity will be eliminated.

In terms of mergers and reorganizations, according to data, a total of 9 steel companies had announced mergers and reorganization plans in 2022, most of which will be concentrated in the second half of the year.

In view of the low base of crude steel production in 2022, and under growth-inducing policies, demand for steel will improve marginally in 2023 but production capacity and output will be impacted.

Electric furnace share impacted: In terms of development of production capacity structure, electric furnace steel has faced some constraints in the past two years. On the one hand, due to the pandemic in the past two years, production and transportation of scrap steel has been affected, and overall supply has been tight.

On the other hand, the tight supply of scrap, coupled with the high energy and electricity prices since 2021 resulted in the cost of electric furnace steel continuing to be higher than that of blast furnaces. Once demand shrinks, electric furnace steel companies will generally be the first to incur losses. This has also made it difficult for the operating rate of electric furnace steel to increase significantly.

Epidemic control measures are being gradually eased and scrap production will also thus resume. Therefore, it is expected that the proportion of electric furnace steel in 2023 will return to the average level seen in 2018-2021- at 9-10%, an increase of 1-1.5 percentage points compared to 2022.

Based on the above analysis, output of crude steel in 2023 may decrease by 10 mnt compared to 2022. Structurally, the decline in crude steel production in 2023 will be mainly contributed by the blast furnace players.