The Chinese steel industry is currently experiencing a significant downturn, often described as a "winter" by Hu Wangming, the chairman of Baowu Steel, the world's largest steel producer. Analysts are increasingly concerned that this sector, which is crucial for capesize ship owners, is facing a prolonged decline. According to the National Bureau of Statistics, steel production in July 2024 dropped by 9% year-on-year, reaching just 82.9 million metric tons, marking the lowest output recorded this year. Overall, steel production in China has slowed down in 2024, trailing 2.2% behind the figures from 2023.
This decline is attributed to several factors, as outlined in a recent report by Greece’s Ursa Shipbrokers. Weak demand for steel, combined with reduced profitability for mills, has been exacerbated by government directives aimed at capping annual production growth at zero. The report highlights that only 5% of Chinese steel producers are currently profitable. Steel prices have plummeted, with rebar futures hitting a four-year low, adding to the financial strain on these producers.
The ongoing slump in China’s property sector has further impacted steel demand, with investments in this area dropping by 10.2%. This decline in construction and real estate activities has created a ripple effect, reducing the overall need for steel. As a result, steel producers in China are now actively seeking new markets to offset the weakening domestic demand.
In response to these challenges, China has ramped up its steel exports. In the first half of 2024, exports increased by 24% compared to the previous year, and experts predict a growth of 27% by the end of 2024. However, this surge in exports has led to a "flood" of Chinese steel in global markets, as reported by MB Shipbrokers. Consequently, global steel prices have dropped by 26% year-on-year, prompting various countries to impose restrictions to protect their domestic steel industries. This raises questions about the sustainability of China’s high export levels in the face of increasing international scrutiny.
Furthermore, the report from MB Shipbrokers warns that the combination of weak domestic steel demand, high inventories of iron ore, and uncertainty surrounding future steel exports could lead to a correction in iron ore imports. Such a shift could negatively impact capesize freight rates for the remainder of the year, posing additional challenges for shipping companies reliant on this trade.
Another indicator of the construction sector's health is the sales of excavators in China, which are projected to decline by 8% year-on-year for the fiscal year 2024, according to a note from Citi. Excavator sales typically reflect construction activity and, by extension, the demand for metals. This further underscores the challenges facing both the property and steel sectors in China.
Despite these headwinds, capesize vessels have been trading within a narrow, profitable range of $19,000 to just over $23,000 over the past month. This resilience occurs even as the global steel market weakens, with Chinese hot-rolled steel prices dropping from $500 per metric ton to $450 per metric ton since mid-July. Analysts from investment bank Jefferies have noted that while softer steel prices are impacting iron ore prices, seaborne cargo movements remain elevated, partly due to a significant decrease in domestic iron ore production in China.
