One of the more-interesting mysteries in the global economy right now is why China’s steel production remains so high. There is no doubt that residential construction has cratered, yet the mills continue to run at 92% capacity.
Today’s Chinese GDP data was strong at +1.3% q/q vs 1.0% expected so there may be even more demand in the pipeline.
I’ve written about this before and met coal prices remain strong on China imports.
I’ve heard explanations about shipbuilding, hidden exports and stockpiling for military use but no one really knows why. It’s something that Scotia explores today in a note on iron ore producer Vale:
Something doesn’t add up in China. In its latest Short Range Outlook, Worldsteel projects China’s steel demand to increase 2.0% in 2023 to 939 Mt and then remain flat at that level in 2024. Admittedly, Worldsteel notes that “There is a downside risk for both 2023 and 2024 if the stimulus effect is weaker than expected”. In our view, however, something doesn’t add up, as even a stabilization in the property sector – at materially lower levels – needs to be offset by weakening growth in steel demand from manufacturing and higher infrastructure spending. As reported, steel inventories in China do not reflect any meaningful increase YTD (Fe port inventories are down). We question what is happening to the steel produced and yet not consumed in key sectors or via exports: how is it accounted for? Is China stockpiling commodities for the future? And if so, is the rationale behind simply tactical (cyclical restocking) or strategic (i.e. in preparation for potential disruptions in the future). While reported demand might be higher than we envision for the year, we continue to think steel use in China should decline over time.
The mystery continues.