12 April 2024 Tathya.Earth
On the demand side China seems to have caught a cold.
China produces more than 50% of the world steel
They imported around 1.18 billion tons of iron ore in 2023 which is close to 70% of the global iron ore import.
It is therefore the most important player in iron ore and basically drives the entire demand and price movement. Being the world’s second largest economy and with a huge push on development, manufacturing and exports, the steel finds in applications in several sectors. Below is a sector wise division of the steel consumption of China, courtesy Reuters.
As per the above distribution, the property sector consumes the highest amount of steel in China. This sector, along with the infrastructure sector, is the backbone of the Chinese economy and any disruption here would highly impact the steel consumption and the resultant iron ore demand.
And if you have been following this sector you might have come across the following news:
The property sector been plagued by liquidity crunches and falling sales over the last year resulting in reduced demand for steel
The crisis has been said to deepen further as the Chinese authorities have also signaled no bailout for the struggling real estate developers.
As per China Real Estate Information Corp (CRIC), China’s top 100 developers posted total contracted sales of 185.7 billion yuan (US$25.8 billion) in February, a decline of more than 60 per cent year on year, and a fall of close to 21 per cent month on month.
How has this reduced demand impacted the steel production?
Let us check how this was reflected in Tathya.Earth’s Hebei Hot Metal Production Index.
The Hebei province, an industrial hub of China produces around 20% of the total steel of China and we monitor all the important steel mills in that region as part of our Hebei Index. The index is therefore a good indicator of the steel production in Hebei in particular and China in general. Below is the trend of the Hebei Index for the last 14 months.
Their data shows that the index has been steadily decreasing from 92.16 to 72.03, resulting in a drop of around 22%. Although there could be many other factors, due to the weightage of property sector in steel consumption, the major factor for reduced demand of steel would have to be the property slump.
They also went one step further up the supply chain and monitored the inventory of iron ore at the major ports of Hebei province and saw that the stockpiles have been climbing up.
This means that steel mills are not procuring enough iron ore to produce steel due to reduced demand of finished steel products. This further confirms that the slump in demand of iron ore is real and there could be a prolonged lower-than-expected recovery of the steel mills output due to the property crisis.
The slump in property and infrastructure growth has been really bad and it is leading to a decrease in steel demand which in turn is leading to a decrease in iron ore demand resulting in a decrease in iron ore price.
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