2022.06.07

The target of reducing crude steel output under the background of carbon neutrality


Ordinary steel: Production continues to decline, with demand expected to recover once the pandemic subsides. Overview: China's steel industry has seen four cyclical periods since the year 2000. 1996 marked China's first year exceeding 100 million tons of crude steel production, claiming the global lead. For the next 26 years, China maintained this top position, accounting for 53% of global crude steel output in 2021. Between 2001 and 2022, the Chinese steel industry navigated four distinct cycles, each varying in duration. Specifically: 2001-2008: Rapid economic growth fueled by industrialization and urbanization boosted real estate and manufacturing, leading to steady steel price increases. While a 2005 overcapacity correction caused a price dip, strong demand remained the dominant factor, culminating in peak steel prices in mid-2008. The late-2008 US subprime mortgage crisis triggered a global economic downturn, impacting real estate and causing a sharp steel price decline. 2009-2015: Economic recovery and the "Four Trillion Yuan Plan" stimulated real estate and infrastructure, resulting in short-term steel price increases. However, post-2011, overcapacity and slowing economic growth led to a four-year price decline, leaving many steel mills unprofitable. 2016-2019: The industry focused on "de-capacity." By June 30, 2017, the elimination of illegal steel production ("ditiao gang") was completed, removing 140 million tons of capacity. Reduced off-balance-sheet capacity improved supply-demand dynamics, pushing steel prices upward. However, increased scrap steel use revived supply, leading to a price drop after the peak. 2020-present: The COVID-19 pandemic caused a global recession and inflation, yet post-pandemic reconstruction supported steel demand. Simultaneously, the dual carbon policy aimed to reduce crude steel production. The combined impact of supply, demand, and cost increases drove rapid price increases. However, from October 2021, real estate market pressures weakened steel demand, causing prices to fall. Supply: The dual carbon strategy limits supply growth. The steel industry is a major carbon emitter. Globally and domestically, the steel industry is among the highest carbon-emitting sectors. According to the World Green Building Council's 2018 Global ABC Report and IEA data, cement, steel, and electrolytic aluminum accounted for 22.7% of global carbon emissions in 2018, with steel second to cement at 10.1%. In September 2020, China pledged to peak carbon dioxide emissions before 2030 and achieve carbon neutrality by 2060. On January 26, 2021, the Ministry of Industry and Information Technology (MIIT) stated that reducing steel production is crucial for meeting these goals. The MIIT planned to implement a constraint mechanism based on carbon emissions, pollutant emissions, and energy consumption, aiming for a year-on-year production decrease in 2021. A 2021 plan targeted a 30% reduction in carbon emissions by 2030. Carbon neutrality necessitates crude steel production reduction. The MIIT's 2020 announcement emphasized crude steel production cuts to meet carbon goals. This included banning new capacity, improving policies, promoting industry consolidation, and directly reducing production. In April 2021, the National Development and Reform Commission (NDRC) and MIIT reviewed steel de-capacity efforts since 2016, focusing on eliminating excess capacity, tackling illegal steel production, monitoring project development, addressing past inspection issues, and managing crude steel production reduction. In 2021, strict production cuts resulted in 103.279 million tons of crude steel, a 3% year-on-year decrease (compared to a 5.2% increase in 2020). Steel production increased by 0.6%, coke production decreased by 2.2%, and ferroalloy production decreased by 4.4%. The production cuts marked a significant shift towards high-quality economic growth. On April 19, 2022, the NDRC announced continued crude steel production reduction efforts for 2022, promoting high-quality development and avoiding a "one-size-fits-all" approach. The focus was on reducing production in key pollution-control regions and among less efficient producers. January-April 2022 saw continued production cuts, with low profits impacting electric arc furnace production. From January to April 2022, crude steel production fell 10.30% year-on-year, pig iron production fell 9.40%, and steel production fell 5.90%. Annual steel consumption is projected to be similar to 2021. Pandemic-related delays are expected to be offset by increased demand later in the year. The China Iron and Steel Association (CISA) targeted a 10 million-ton reduction in 2022. The January-April data showed a nearly 35 million-ton reduction, suggesting a potential 25 million-ton increase in the second half of the year. April 2022 saw daily crude steel production up 8.58% month-on-month but down 5.18% year-on-year; pig iron production was up 10.81% month-on-month and up 1.06% year-on-year. Hebei, Shandong, and Jiangsu provinces experienced the largest production declines. By May 27, 2022, blast furnace operating rates were up, reflecting the resumption of work and production. Electric arc furnace operating rates were down 15.37% year-on-year in late May 2022, reflecting low profitability. This reduced steel supply helped support prices. Demand: Weak real estate starts, but manufacturing remains relatively strong. 2021 fixed asset investment grew by 4.9%, averaging 3.9% over two years. In the first four months of 2022, investment grew by 6.8%. Manufacturing investment accounted for the largest share (32%) in 2021. First-quarter manufacturing investment showed growth, but sustainability is uncertain. January-April 2022 saw a 12.2% increase, with technological transformation investment up 17%. High-tech manufacturing investment grew by 25.9%. However, international factors and the pandemic are squeezing manufacturing profits, particularly for smaller firms. Real estate investment remains weak despite policy support. January-April 2022 saw a 2.7% year-on-year decline in real estate development investment, with new housing starts down 26.3%. Sales also declined significantly. While policies aim to stimulate the market, their effectiveness remains limited. Infrastructure investment played a significant role in the first quarter and continues to be a key driver of economic growth. January-April 2022 saw a 6.5% year-on-year increase in infrastructure investment (excluding utilities). Water conservancy and public facilities investment showed strong growth, while railway transport investment declined. Construction steel accounts for approximately 55% of steel consumption, primarily driven by real estate and infrastructure. Continued real estate weakness may improve marginally with policy support. Rebar demand is closely tied to real estate, with new starts showing continuous year-on-year declines. The real estate development cycle (land acquisition to completion) typically takes 2-3 years, with peak steel demand in the initial months of construction. The decline in new housing starts since February 2021 poses a challenge to future steel demand. Rebar demand correlates strongly with new housing starts, construction, and completion. Since late 2020, stricter regulations on real estate financing have impacted the sector, leading to liquidity issues for some developers. While easing policies have been introduced, their impact remains limited, and construction indicators remain low.

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