Everyone thought a COVID-19-ravaged steel supply market in China
took a turn towards recovery. However, many other hurdles now stand in the way,
both long & short-term. Power cuts and muted demand driven by the construction
crisis in China stand in the path of growth. Even worse, the cascading effect
has affected the supply of critical commodities like coking coal and iron ore.
Like India, infrastructure
growth plays a major role in China’s consumption of steel. However, because of
the post-COVID-19 slowdown and the worsening property crisis, the steel sector
has not bounced back the way it was anticipated.
The prognosis looks bad, as
evident from this statement by Li Ganpo, founder & chairman of Hebei Jingye
Steel Group. Ganpo reportedly warned at a private company meeting a few weeks
ago that almost a third of China’s steel mills could go bankrupt. This would
result in massive steel supply chain disruptions.
Steel Supply
Strain Effecting Banks
Many in China have lost hope of
a turnaround in the near future. This pessimism is clear in the many reports
coming out of China.
The real-estate crisis has not
only affected property developers and steel makers but even banks. Once one of
the largest producers and consumers of steel and related products, Chinese
steel mills would regularly manufacture over a billion tons. This accounts for
about half of all global output. Now, this seems a distant memory, with the
slump affecting iron ore prices and even supply mines in Brazil & Australia.
Related: IAEA Close To Deal With Russia, Ukraine To
Inspect Shelled Nuclear Plant
Australia’s biggest export
item, iron ore, faces supply chain threats because of the Chinese slowdown.
Experts forecast that prices will go down by 50% in 2023 with China’s deepening
property crisis. Consumers are either not buying new houses or have defaulted
on housing loans.
China remains the largest buyer
of Australian iron ore. Prices did rise within the past week after China’s
easing of the rules, but this was short-lived.
Chinese
Government Looking for Solutions
The People’s Bank of China
announced a few measures like slashing the five-year prime mortgage rate and
the one-year loan prime rate. However, many feel that 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 closure for lack of takers.
To complicate matters, a heat
wave in many parts of China led to electricity rationing. This led to the
temporary shutdowns of various Chinese steel mills recently. About 20 steel
mills in China’s southwest regions suspended operations.
The Government there has yet to
send out any signals of big bailouts. Unlike the property market crisis in
2015, President XI Jinping now looks reluctant to launch a financial stimulus
package that could kickstart infrastructure spending and indirectly revive the
steel and ore sectors. This leaves limited room for steel makers to maneuver.