World crude steel production was 169.5Mt in May 2022, a 3.5% y-o-y drop. For the January-May period, it was 791.8Mt, a 5.1% y-o-y decline. The fallback reflects the weak global environment marked by the Ukrainian conflict, rising inflation and interest rates, growing recession concerns and China’s zero-COVID policy.

Crude steel production has been falling across the board. China's zero-COVID policy continues to constrain the economy and while Beijing and Shanghai are gradually re-opening, a fresh round of lockdowns have been implemented in eastern China which pose a fresh threat to recovery.  The end of China’s zero-COVID strategy does not appear to be in sight.  Indeed, in late June, Beijing suggested that zero-COVID policies including mandatory testing and travel restrictions could be in place for the next five years.   As such, many remain downbeat about the prospect of a major revival. 

China’s May steel production posted a 3.5% y-on-y drop and a 6.9% y-on-y decline for the first five months of the year. The rest of the world’s steel production also dropped 3.5% y-on-y in May and 2.8% y-on-y in the Jan-May period.  Ukraine recorded the largest May drop (-17% y-on-y), followed by the EU (-6.8% y-on-y) and Japan (-4.2% y-o-y). The USA posted only a 2.6% y-on-y drop and Russia a 1.4% y-on-y decline. The only exception has been India, which posted a 17.3% y-on-y increase, as its large domestic economy shelters it from global turbulence.

However, China’s crude steel production increased 4.1% m-on-m in May, as blast furnaces resumed production, preferring to operate than remain idle.  Pig iron consumption, a reflection of blast furnace (BOF) output, increased 4.6% y-on-y in May, implying higher utilisation rates compared to electric furnaces (EAFs).  The latest (June) operating rates indicate 43.9% for EAFs and 89% for BOFs.  In Q1 2022, low steel output helped to keep prices up despite weak demand but recovering production has driven prices downwards with Chinese rebar prices losing about 15% since early May.

With raw material prices remaining high, steel mills have been losing money over the past few months, both for rebar and hot-rolled products.  As a result, several mills have announced maintenance work for the June-August period, as demand is expected to remain weak, due to seasonality and COVID restrictions.   The low profitability of steel mills is illustrated by the narrowing discount of low-grade 68% Fe iron ore to the 62% Fe benchmark, as mills look at minimising their cash outflows.

The outlook for H2 2022 is mixed. In late June, the People’s Bank of China emphasized that monetary policy will be used to support economic recovery. However, if China wants to have any chance of achieving economic growth close to 5%, it needs domestic consumption to pick up quickly, as monetary policy alone will not be sufficient. In the world ex-China, there is no end in sight to the Ukrainian conflict and the odds of a recession are increasing, especially in Europe.

The last week has seen a weaker iron ore price, dropping to US$111/t before rebounding to US$123/t.  Seaborne shipments are on the rise and a rebound in the Chinese economy would be necessary to bring back the iron price to its previous US$130-140/t levels. In the short term, it will remain volatile and driven by the China news flow.