The world’s largest steel industry is going through a ‘winter’ amid a supply glut and weak demand

China’s steel industry has been struggling as the country’s property sector remains in the doldrums and is unable to absorb excess capacity, industry watchers told CNBC.

“Chinese demand has been a major disappointment for metals across the board,” said Sarbin Chowdhury, head of commodities analysis at BMI, highlighting the slump in steel and iron ore in particular.

“This is mainly due to the weak property sector in China. The property sector downturn is set to last several years, and that definitely does bode negatively for industrial metals that are required in infrastructure,” she added. 

China is the world’s largest producer of steel, accounting for more than half the world’s output at over a billion tons a year.

It is also the world’s leading consumer of steel and iron ore, and prices for both materials have dropped as steel supply remains bloated amid weak domestic demand.

China steel rebar prices are down over 20% year to date at 3,208 Chinese yuan ($450) per ton, data from financial information provider Wind showed. Prices of China iron ore, the key material for steel, have plunged over 28% so far this year, according to FactSet data.

Hu Wangming, chairman of the world’s largest steel producer, state-owned Baowu Steel, recently said the steel industry was going through a “winter,” adding that the industry was in the midst of a long-term adjustment period.

The Chinese steel industry is caught “between a rock and a hard place” as steel makers’ margins are getting increasingly squeezed by weak demand, said Bank of America’s Head of Asia Pacific Basic Materials, Oil and Gas Research, Matty Zhao. The muted demand is expected to continue into 2025 on the back of a “very weak” Chinese property market, she told CNBC. 

Additionally, with no specific measures announced at the country’s high-profile Third Plenum gathering, hopes are fading that China’s embattled property sector will come out of its slump.

Excavator sales in China are expected to be down 8% year on year for fiscal year 2024, Citi wrote in an August note. Excavator sales are usually seen as a leading indicator of construction activity, and by extension, metals demand.

“Steel mill margins in China are at risk of falling to the most negative levels this year, applying potentially even more downward pressure on iron ore prices,” said Commonwealth Bank of Australia’s Vivek Dhar.

China steel makers have racked up losses over the past 12 months, with steel makers looking to export markets for better prices, said BofA’s Zhao.

Several countries have levelled dumping charges against China as its producers attempt to boost exports amid the slowdown in the domestic market.

Thailand recently announced the implementation of anti-dumping duties on hot-rolled steel coils from China. Last September, India also imposed anti-dumping duties on certain Chinese steel for five years. Vietnam’s Ministry of Industry and Trade has also launched an investigation into some types of hot rolled coils from China and India.

“Chinese exports have had a material impact on steel production prospects in rest of the world,” said Citi’s analysts.

July saw 57.1 million tons of net steel exports out of China, and if that rate sustains for the rest of the year, 2024 would see a 17% year-on-year increase of Chinese net steel exports, said Citi’s team, adding that 2023’s increase in steel exports reduced the steel production head room for the rest of the world.

Chile’s largest steel mill Compañía Siderúrgica Huachipato recently announced that it would close its steel operations “indefinitely,” as a result of “the impossibility of competing with Chinese steel.” 

The world’s second-largest steel producer, ArcelorMittal, has said that China’s excess production has rendered the steel market conditions “unsustainable.”

“China’s excess production relative to demand is resulting in very low domestic steel spreads and aggressive exports,” the Luxembourg-based company said in its second quarter results.

China’s steel-dumping could lead to oversupply in its export destinations, hurting domestic steel-makers’ stock prices, said BofA’s Zhao. 

Five Southeast Asian countries including Vietnam, Thailand, the Philippines, Indonesia, and Malaysia absorbed 26% of China’s steel exports in 2023, followed by South Korea at 9%, according to BofA’s statistics.