China’s steel fundamentals in flux on decarbonization drive: 2022 preview

China’s steel production and end-user demand are likely to experience some dampening in 2022 amid the country’s stringent decarbonization policies, market participants told Fastmarkets

Steelmaking_2022 Preview watermark

Steelmaking_2022 Preview watermark

sagarmanis/Getty Images/iStockphoto

New regulations, carbon emissions trading

China will implement a set of energy-consumption standards for iron and steelmaking from January 1, 2022 to align them with the country’s decarbonization guidelines, according to a notice released by the National Development & Reform Commission on November 15.

China is also using carbon trading as a tool to regulate and reduce emissions.

Some local governments have issued decarbonization targets for their steel industry.

For instance, Shandong province, China’s third-largest steelmaking hub, in November published a set of limits for the steel industry in its 14th five-year plan (2021-2025) to protect the environment.

“China’s crude steel production might be around 1 billion tonnes in 2022,” Li Xinchuang, chairman and chief engineer of the China Metallurgical Industry Planning and Research Institute (MPI) said at the 10th China Steel Technology & Economy Forum on December 3.

If November and December’s production rates were the same as October, he estimates China’s 2021 crude steel output at around 1.02 billion tonnes.

China produced 877.05 million tonnes of crude steel in the first 10 months of this year, down by 0.7% from the corresponding period of last year, according to the National Bureau of Statistics. October’s crude steel output was 71.58 million tonnes, down by 23.3% year on year, according to the bureau.

Shanghai-based securities company Guotai Junan (GTJA) predicts that China’s crude steel output will decrease by 1.8% in 2022 from 2021 amid the country’s decarbonization drive.

This has raised the possibility that China might impose export duties on certain steel products to reduce exports and keep more steel products for domestic consumption, market participants said, although this has been somewhat assuaged by a recent announcement by the country’s Ministry of Finance that there would be no changes to tax duties for ferrous imports on December 15.

“Export volumes for hot-rolled products, especially hot-rolled coil, may decline significantly. Exports of cold-rolled products, including cold-rolled coil and hot-dipped galvanized coil, that don’t need fuel during the production process might remain active in 2022,” an exporter source in eastern China said.

Slowdown ahead for steel demand growth

Market participants expect steel consumption in 2022 to be weaker than in 2021 because downstream industries will start to use higher-strength or better-quality steel to reduce the tonnages consumed amid the decarbonization efforts.

For instance, the automobile industry is developing high-strength steel to reduce vehicle curb weight and lower energy consumption.

Benxi Iron & Steel’s cold-rolled dual-phase steel with enhanced formability - DH590 and DH780 - has been used by some automotive producers to favorable reviews, including for decreasing production costs and improving welding performance.

Infrastructure projects are also expected to use more structural steel for construction, compared with older practices of using rebar and concrete.

China aims to raise the share of steel structure buildings to 15% of newly built buildings by area in 2025, against a rate of 11.81% in 2020, according to the China Building Metal Structure Association.

While China’s economic recovery from the Covid-19 pandemic has been solid, supporting steel demand between mid-2020 until 2021, this may not be the case in 2021, sources said.

“Steel demand is likely to decline from next year, with strong downward pressure on the economy,” an industry analyst at Shanghai-based futures company Everbright said.

Securities company GTJA expects overall demand to dip by about 1%, with demand from the housing sector falling by about 8%, while infrastructure demand inches up and manufacturing demand remaining robust.

The People’s Bank of China reduced the reserve requirement ratio (RRR) for commercial banks by 0.5 percentage points from December 15, which will release 1.2 trillion yuan of long-term liquidity.

But market participants expect the liquidity flow to the housing market to be limited in 2022.

Manufacturers and small companies are the main beneficiaries in this latest policy, sources said.

The Political Bureau of the Chinese Communist Party’s Central Committee on December 6 held a meeting to analyze and study the economic work in 2022, and announced that China would continue its indemnificatory housing construction and support the commercial housing market to better meet the reasonable housing needs of buyers.

“This means China will continue to restrict speculation in the housing market in 2022, which will curb the industry’s overexpansion,” the analyst at Everbright said.

The financial crises faced by some major property developers such as Evergrande Group will also make buyers more cautious when buying pre-sale houses.

“Property developers will be more careful with next year to avoid stepping on the ‘three red lines.’ Lowering inventories of raw materials, including rebar, will be one approach,” a second analyst said.

In the manufacturing sector, market participants expect good demand from industries such as clean energy, automotive production, container production and shipbuilding.

China’s decarbonization drive is expected to boost steel demand from wind and solar energy-based power-generation facilities.

Demand for high value-added products such as heavy plate used in wind farms and high-end non-oriented electrical steel, and high-strength, lightweight, corrosion-resistant and fatigue-resistant steel structures used in photovoltaic power generation will increase significantly, securities company GTJA said.

Automotive production is also expected to increase in 2022 once the semiconductor chip shortage eases, which will support demand for HRC, CRC and HDG, traders in eastern China said.

Container production is also expected to continue its strong growth in 2022 because container supply remains tight amid congestion in certain regions caused by Covid-19, according to GTJA.

Shipping orders are also increasing in China, bringing with it strong demand for plate and HRC in the next two or three years.

China’s shipyards took orders for 61.49 million deadweight tonnes (dwt) of new ships in January-October, up by 210.5% from the corresponding period of last year.

And ship builders in the country had a total of 98.1 million dwt worth of orders in hand at the end of October, up by 38.2% from a year earlier, according to the China Association of the National Shipbuilding Industry.

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