Banking on stimulus, China steelmakers ramp up production

By Min Zhang and Gavin Maguire

BEIJING/SINGAPORE (Reuters) - China's steel mills are rapidly cranking up output on rising profit margins and hopes that government stimulus will revive consumption, despite an overhang of inventories and a slowdown in global steel demand due to the coronavirus pandemic.

While mills in Japan, India and Europe are cutting production, China's output of rebar, used for construction, has surged in recent weeks.

The push risks saddling producers with excess supplies that may be hard to offload, analysts say, and could undermine efforts to rationalise a bloated steel sector. The main industry body warned this week against adding to production or re-starting closed capacity while demand remains fragile.

China churned out 234.45 million tonnes of crude steel in the first three months, up 1.2% compared with same period a year earlier.

Blast furnace utilisation rates at 247 Chinese steel plants have increased for six consecutive weeks from less than 74% in mid-March to 80.59% as of April 24, sending weekly output of finished products to the highest in about four months, data tracked by Mysteel consultancy showed.

Graphic: Profit margins at China's mills vs utilisation rates https://fingfx.thomsonreuters.com/gfx/ce/azgpommowpd/1.jpg

Production of construction material steel rebar, more popular with private and smaller mills, has jumped 43% since mid-March. Production of wire rod, also used in construction, is up 31.6%.

Output of cold-rolled and hot-rolled coil, used mainly in manufacturing, has risen just 2.6% and 1.7% respectively.

The emphasis on rebar stems from hopes that Beijing's infrastructure push will drive a strong recovery in construction activity in late 2020 after early signs of a pickup as the country emerges from lockdown.

"We estimate there will be at least 5.5% growth in infrastructure spending this year, which can offset a 4% drop of steel use in property," said Zhuo Guiqiu, an analyst with Jinrui Futures.

Beijing has issued 1.8 trillion yuan ($255 billion) in local government bonds, including 1.2 trillion in special bonds, to finance infrastructure projects to help reignite economic activity.

The China Iron and Steel Association (CISA) expects construction to account for about 58% of steel demand this year, up from a typical 55%.

TOO MUCH, TOO SOON

Analysts, however, caution that higher infrastructure demand may not be enough to fully offset a drop in demand from other sectors.

"To further make up the losses in the manufacturing sector, the growth in infrastructure would need to reach 14%," Zhuo said, well below the group's 5.5% forecast.

Seasonal output at key steel-consuming sectors https://fingfx.thomsonreuters.com/gfx/ce/jbyvrjjglve/2.jpg

Elsewhere, investment growth in China's property sector is set to slow to 6% in 2020 from 9.9% last year, a Reuters poll of 14 analysts in March found.

And consumption of sheet products, used in manufacturing, is set to fall by 9%-10% versus 2019, according to a forecast by Zhenzhen Jiang at CRU in Beijing.

Coronavirus lockdowns across key markets for goods made in China are also expected to dent export demand for both intermediate metal products and finished goods like home appliances and machinery.

The world's top steel producer shipped out 14.3 million tonnes of steel products in the first quarter, down 16% on an annual basis, customs data showed.

China's steel production vs exports https://fingfx.thomsonreuters.com/gfx/ce/rlgvdwwdnpo/3.jpg

Zhilu Wang from Wood Mackenzie expects Chinese steel consumption to ease 2.2% this year, and direct steel product exports to fall below 60 million tonnes from 64.29 million tonnes in 2019.

This comes as stockpiles of finished steel products are already hovering at six-year highs.

Weekly steel output in China vs steel inventories https://fingfx.thomsonreuters.com/gfx/ce/oakvezqodpr/Steeloutput.jpg

(Reporting by Min Zhang in Beijing and Gavin Maguire in Singapore, additional reporting by Yawen Chen; Editing by Richard Pullin)