In the first quarter of this year, the steel industry in China experienced its worst performance in 15 years, signaling a deepening crisis. Liu Zhenjiang, vice chairman of the China Iron and Steel Association, highlighted that the industry is now entering what he calls "the real winter." This sentiment comes after January and February saw record losses, with key steel producers suffering significant financial setbacks.
According to data from the association, the steel sector's performance in the first two months of 2014 was worse than in the previous two years. In January alone, major steel companies reported losses totaling over 1 billion yuan, with 43% of firms operating at a loss—its highest level in recent history. February also failed to bring relief, as demand continued to drop and production remained high, exacerbating the imbalance between supply and demand.
Despite the weak market conditions, crude steel output in the first two months of 2014 reached 130.8 million tons, up 1.7% year-on-year. The average daily output hit 2.217 million tons, a 10.2% increase compared to the same period last year, marking a new high. However, this surge in production has not been matched by strong demand, leading to increased inventory levels and pressure on steelmakers.
The profitability of 163 steel mills dropped to 28.22% in the previous week, down 4.91% from the prior period. While social steel inventories have declined for two consecutive weeks, falling nearly 9% year-on-year, the inventory of key steel companies still rose by 28% compared to the same period last year. This suggests that the burden of excess stock remains concentrated at the producer level, while traders and end-users face relatively lighter pressure.
Liu Zhenjiang pointed out that two key factors have contributed to the current downturn: declining market demand and stricter policy constraints. Demand in January fell 8.6% year-on-year, while steel production only decreased by 3.2%, creating a mismatch that has worsened the industry’s challenges. Additionally, environmental regulations, differential electricity pricing, and credit constraints have placed further strain on steel companies.
Steel prices have continued to fall, reaching a five-year low last week. The domestic steel price index closed at 122.33 points, down 0.75% for the week. In construction steel markets, prices dropped across most regions, with Shanghai, Beijing, and Changsha seeing declines of between $10 to $110 per ton. The falling iron ore prices have fueled panic in the steel market, with businesses expressing pessimism about future conditions.
The spot price of rebar is now near its lowest level since early 2007. Analysts suggest that while prices may dip slightly further, there could be a temporary rebound in the short term. Meanwhile, the plate and hot-rolled coil markets remain under pressure, with prices falling consistently. Leading steel mills like Baosteel and Wuhan Iron and Steel have adopted a cautious approach, keeping their April ex-factory prices flat.
Although environmental policies and the elimination of outdated production capacity are expected to help the industry, their impact has been limited so far. Crude steel output has begun to rise again, but downstream demand remains sluggish, maintaining the supply-demand imbalance. With steel prices approaching marginal costs, the room for further declines is shrinking, and the market may see a brief recovery.
The China Iron and Steel Association expects steel demand to gradually pick up as the weather warms. However, economic growth continues to face downward pressure, and the growth of steel demand is likely to slow. In the short term, oversupply will remain a challenge, and while prices may stabilize due to cost support, a sharp rebound is unlikely.
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