Behind China’s Steel Industry Crisis: Eroded Confidence and Challenging Trade

In the aftermath of China’s largest private property developer, China Evergrande, facing financial turmoil, the domino effect has reverberated through the closely linked steel industry. Amid the turmoil, an alarming wave of financial crises has hit the steel sector, which is intricately linked to real estate, leading to a slew of defaults.

A case in point is a construction group in Sichuan Province, which undertook real estate projects and procured steel materials but failed to settle payments on time. After unsuccessful attempts to recover dues, the steel suppliers resorted to legal action, only to discover that the construction group had no traceable assets left. This has resulted in over a hundred lawsuits and implicated 11 affiliated steel trading companies in Sichuan, with accumulated unpaid steel supply funds exceeding hundreds of millions of yuan.

Adding to the woes, another company recently defaulted on steel payments, involving sums ranging from hundreds of thousands to tens of millions of yuan. According to informed sources, losses in steel payment defaults have surged to over 300 million yuan due to various factors in recent years. As of this report’s publication, more reports of similar financial crises are looming, awaiting confirmation. In response, industry associations in Henan, Sichuan, Jiangsu, and other provinces have issued cautionary notifications about steel trading.

As of July 15, the first half-year financial forecasts for A-share listed steel companies have been released. Among the 23 companies that issued forecasts, 4 expect increased net profits, 6 anticipate net profit declines, and 13 project net losses, amounting to nearly a billion yuan in losses. The steel industry is clearly facing a downturn, marked by over 100 billion yuan in losses. Industry insiders attribute these losses primarily to overcapacity and weak demand.

While steel enterprises grapple with losses, the situation for steel traders is even bleaker. According to Ren Xiangjun, business conditions have deteriorated, with enterprises experiencing continuous losses for over six months. This prolonged slump has eroded confidence from pessimism to near collapse. Whenever there is an inquiry or order in the market, steel trading companies rush to compete by offering lower prices to survive, collectively lowering risk prevention measures. This scenario has paved the way for a series of financial crises.

Presently, China’s domestic steel market is grappling with a severe situation: sluggish demand, excess production capacity, high raw material costs, and plummeting mill profits. According to data from the National Bureau of Statistics, the ferrous metal smelting and rolling processing industry’s operating revenue for the first half of 2023 stood at 4.039 trillion yuan ($627.5 billion), down 9.6% YoY, with total profits plunging to a mere 1.87 billion yuan ($291 million), a decline of 97.6%. The entire steel industry chain, from steel mills to trading companies, is now operating on razor-thin margins or incurring losses.

Several steel company executives interviewed stated that the market conditions for the steel industry in the first half of this year have not seen significant changes from the previous year. The overall trend is characterized by “weakened demand, declining prices, rising costs, and diminishing profits.” Li Li, a research and development executive at a steel company, explained, “The main reason for widespread losses in the steel industry is the lackluster market demand. With lower-than-expected commencement rates for real estate and infrastructure projects, demand for steel has naturally remained subdued.”

Steel demand closely follows real estate and infrastructure investments. The slowdown in new real estate projects has directly impacted steel demand, particularly for rebar. Industry analyst Li Guangbo noted that overcapacity, the U.S. Federal Reserve’s shift to an interest rate hike cycle, and global economic growth deceleration are all contributing factors to the current dire state of the steel market. However, the primary cause is the significant contraction of the real estate sector.

Li Guangbo stated, “Since May 2021, the real estate market has cooled rapidly due to various factors, including cyclical and policy factors. Headlining private property developers are experiencing cash flow constraints, with some publicly defaulting on market debt. Suppliers upstream and downstream have begun to accept only cash transactions. This phenomenon indicates that the problem isn’t isolated to individual companies; it’s a systemic issue.”

China Iron and Steel Association’s Deputy Chairman Luo Tiejun emphasized in a report on China’s steel demand structure and future trends that the country’s steel consumption has experienced a notable decline in recent years, projecting a trend of fluctuating decline in crude steel consumption in the coming years. He further highlighted a structural shift in steel demand, with growth anticipated in areas like steel structures, photovoltaics, and specialty steels for new energy vehicles. While automotive steel demand may fluctuate, the shift will significantly impact the investment direction of steel enterprises.

Luo Tiejun stressed that the issue of overcapacity in the steel industry requires immediate attention. “The new round of reshuffling our steel industry—cutting excess capacity—is imminent. Internationally, all developed countries have experienced rapid economic growth and vigorous steel industry development, followed by economic normalization and the adjustment of surplus steel industries. This process is no different.”

During the recent “First China Steel Tube Industry Summit,” Li Tao, a counselor of the Henan Provincial People’s Government and former director of the Henan Provincial Department of Industry and Information Technology, revealed that actual demand and production of steel in China have experienced a downward trend in recent years, decreasing by around 1% last year and 2% the year before. He predicted a further cliff-like descent, projecting steel production to fall from one billion tons to six to seven hundred million tons over the next five to eight years.

As for the future development trends of steel mills, Li Tao anticipates a division into three categories: first-tier behemoths with production capacity of 100 million tons or more, such as Baowu and Anshan Iron and Steel; second-tier companies with around 10 million tons of production; and third-tier specialized and innovative enterprises with production capacities of 2 to 3 million tons. He concluded, “The overall landscape of future steel mills will consist of very few giants, around seven or eight, a few dozen medium-sized companies with around 10 million tons of production, and hundreds of small, specialized, and innovative firms. The total number of steel mills nationwide will not exceed 1,000. This will be the three-tiered model for future steel mills, each with its unique strengths and survival strategies.”

China Iron and Steel Association’s Chief Analyst and Secretary-General of the Metallurgical Industry Economic Development Research Center, Li Yongjun, shares a similar view. He emphasized that China’s per capita consumption of crude steel has remained above 500 kilograms for a decade. Future per capita consumption will likely fluctuate between 500 kilograms and 700 kilograms, indicating long-term stability. He concluded, “Thus, China’s apparent steel consumption will probably fluctuate around 800 million tons in the future, without a sustained downward trend.”

Currently, whether it’s a “painful treatment” or “amputation,” all stakeholders in the Chinese steel industry are bound to experience secondary trauma. This process is not only painful but also long-term. Yet, it is an inevitable stage for China’s economy to transition from extensive development to high-quality transformation. Chen Leiming stated that the issue of overcapacity in the steel industry is not merely an internal concern but a complex societal problem that China currently faces. He emphasized that this is a reflection of China’s economic transition from extensive development to quality-driven transformation, and it warrants deep contemplation.