China’s steel industry is in crisis

Everyone thought a COVID-19-ravaged steel supply market in China had taken a turn towards recovery. However, many other obstacles now stand in the way, both long and short term. Power cuts and sluggish demand caused by China’s construction crisis are holding back growth. Worse still, the cascading effect has affected the supply of essential raw materials like coking coal and iron ore.

Like India, infrastructure growth plays a major role in China’s steel consumption. However, due to the post-COVID-19 downturn and worsening real estate crisis, the steel sector has not rebounded as expected.

The prognosis seems poor, as evidenced by this statement by Li Ganpo, Founder and Chairman of Hebei Jingye Steel Group. Ganpo reportedly warned at a meeting of private companies a few weeks ago that nearly a third of China’s steel mills could go bankrupt. This would cause massive disruptions to the steel supply chain.

Steel Supply Banks

Many in China have given up hope of a turnaround in the near future. This pessimism is evident in the numerous reports from China.

The real estate crisis has not only affected property developers and steelmakers, but also banks. Once one of the largest producers and consumers of steel and related products, China’s steel mills regularly produced more than a billion tons. This represents about half of all world production. Now that seems like a distant memory, with iron ore prices plummeting and even supply mines in Brazil and Australia.

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Australia’s main export, iron ore, is facing supply chain threats due to the Chinese slowdown. Experts predict that prices will fall by 50% in 2023 as the real estate crisis in China worsens. Either consumers aren’t buying new homes or they haven’t paid off their home loans.

China remains the biggest buyer of Australian iron ore. Prices rose over the past week after China relaxed rules, but that was short-lived.

The Chinese government in search of solutions

The People’s Bank of China announced a few measures such as reducing the five-year prime mortgage rate and the one-year loan prime rate. However, many believe it was too little too late. This lobby believes that conditions will not improve for the rest of 2022.

Steel mills were once at the forefront of China’s economic expansion. But now conditions have deteriorated to the point that many are on the verge of closing for lack of takers.

To complicate matters, a heat wave in many parts of China has led to power rationing. This has recently led to the temporary closure of various Chinese steel mills. About 20 steel mills in southwestern regions of China have suspended operations.

The government has yet to send any signals of big bailouts. Unlike the property market crisis of 2015, President XI Jinping now seems reluctant to launch a financial stimulus package that could revive infrastructure spending and indirectly revive the steel and minerals sectors. This leaves limited room for maneuver for steelmakers.

By AG Metal Miner

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