Weak Outlook for China’s Steel Market: NDRC’s Latest Report
On January 8, 2025, China’s National Development and Reform Commission released the findings of its steel sector survey. The results paint a bleak picture for the domestic steel market, showing significant declines in key market indices, including sales and purchase price expectations, which signal an ongoing weakness. The survey covered steel markets in major cities such as South China, Shanghai, and Tianjin, highlighting national concerns about the performance of the steel sector.
The Sales Price Expectation Index, a key measure of the anticipated direction of steel prices, fell to 27.8% for January 2025, marking a 7.7 percentage point drop from the previous month of December 2024. This decline represents the lowest level since July 2021, indicating substantial concerns among steel producers and buyers regarding future price levels. Similarly, the Purchase Price Expectation Index also witnessed a decline, falling by 5.2 percentage points to 29.9%.
Declining Demand and Softening Market Sentiment
The ongoing slump in steel prices and demand is largely driven by seasonal factors. During the winter months, particularly in the lead-up to the Chinese New Year, which begins on January 28, 2025, steel consumption tends to fall as construction activity slows down due to colder weather and preparations for the national holiday.
The Sales Volume Expectation Index for January, which measures the expected demand for steel, recorded a sharp decline to 15.6%, a 19.5 percentage point drop from December 2024. The survey points to seasonal demand dips, with construction steel sales expected to severely reduce in the weeks before the CNY holiday. In past years, steel trading in the spot market has largely ceased before the holiday, which contributes to the general slowdown in activity across the market.
Rising Inventories and Shrinking Supply
As demand falters, steel inventories have been building up, as indicated by the Inventory Expectation Index, which increased to 68.9%, an 11.4 percentage point rise from December. The NDRC survey suggests that steelmakers, although reducing production to some extent by shutting down facilities for maintenance, are unlikely to balance the rising stockpiles caused by weakened demand.
The NDRC forecasts that inventory levels may continue to rise as the steel supply continues to exceed the available demand in the short term. A reduction in steel supply is anticipated as maintenance stoppages by steelmakers increase, but this is unlikely to offset the soft demand, leaving the market with excess inventory.
Profitability Pressures Persist
While the NDRC anticipates lower production costs due to reduced material and energy expenses, profit margins remain under significant pressure. The Sales Cost Expectation Index for January 2025 dropped to 44.3%, reflecting lower cost expectations for steel producers. However, the Sales Profit Margin Expectation Index also declined to 28.8%, a 9.1 percentage point drop from December 2024, indicating continued profit margin pressures due to lower demand and pricing.
Steelmakers are facing financial stress as sales prices continue to fall, and cost-cutting measures are insufficient to fully compensate for the reduced demand. This is contributing to a tightening financial environment for many producers, especially smaller firms that may struggle to cover fixed costs without adequate demand.
Potential for Policy Intervention
Despite these ongoing challenges, the NDRC report highlighted a few positive signs that might help stabilize the market in the near future. One key aspect is the expectation of government intervention. The central government is likely to implement policy measures aimed at boosting industrial performance and supporting the steel sector, which may include fiscal incentives, supply-side reforms, or other stimulus programs.
While the NDRC report did not provide detailed insights into potential government policies, the expectation of policy support is seen as a vital factor that could help restore some confidence in the market. In addition, winter stocking demand from traders could provide a short-term boost to steel consumption, offering relief before the industry faces the effects of the Chinese New Year holiday period.
Impact on Key Steel Products
The decline in overall demand is expected to have a significant impact on specific steel products. For instance, products related to construction will likely experience the most significant slowdown, as the construction industry scales back during the winter months. However, there are certain segments that may experience relatively stronger demand due to their use in high-tech industries and energy systems. This includes products like electrical steel (used in energy grids and renewable energy sectors) and specialty steel for high-end equipment.
Key Metrics in the NDRC Survey:
• Sales Price Expectation Index: Fell to 27.8%, the lowest since July 2021.
• Purchase Price Expectation Index: Decreased to 29.9%.
• Sales Volume Expectation Index: Dropped to 15.6%, a 19.5 percentage point fall from the previous month.
• Inventory Expectation Index: Rose to 68.9%, an 11.4 percentage point increase.
• Sales Cost Expectation Index: Dropped to 44.3%.
• Sales Profit Margin Expectation Index: Fell to 28.8%.
What This Means for the Market Going Forward
While China’s steel market faces weakening demand and declining prices as we enter January 2025, the inventory buildup, profit margin pressures, and slowing construction activity are key signs that the market will continue to face challenges in the near term. However, the possibility of government intervention and some winter stocking demand may provide temporary relief. The coming months will be critical in determining whether policy support and other measures can help stabilize the market before the industry moves into the traditional post-holiday recovery phase.
As the steel industry navigates through these turbulent times, industry players, including steelmakers, traders, and government officials, will closely monitor any signs of economic recovery or structural changes in the market dynamics that may offer a way forward.
