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(Bloomberg) — China is still producing too much steel, setting up the industry for more pain as domestic consumption drops and unprofitable mills reach a tipping point.

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Output edged lower in 2024, although it stayed above 1 billion tons for a fifth consecutive year. Deeper cuts will be necessary to align with demand, which is faltering due to the protracted crisis in China’s property market and the changing nature of its economy. 

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Decades of expansion driven by construction and state investment are at an end, and new growth areas for the industry aren’t enough to replace those drivers. The government is shifting its focus to greener, high-tech growth and consumption, which is shrinking steel’s importance to the economy. 

“The worst is not over,” said John Chen, Standard Chartered Plc’s regional head of commodities sales in Singapore. “Almost all steel mills are bleeding.” 

Chinese research firm Mysteel expects output to sink to less than 900 million tons by 2030. Some projections for demand are even more stark. 

From over 1 billion tons in 2020, Chinese steel consumption could fall below 800 million tons by 2030, according to the base case forecast by Bloomberg Intelligence. Its worst case is that consumption plunges to 525 million tons by the end of the decade. 

Those kind of predictions have lit a fire under efforts to consolidate the industry, which are likely to speed up this year as mills struggle to maintain cash flow and margins. The sector has lost money for most of the year, while its total debt had climbed to a record 5.1 trillion yuan ($696 billion) by November, according to the statistics bureau. 

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Smaller, private mills are most vulnerable as they tend to focus on construction steel and are more geared to the crisis in the property market, said Mysteel analyst Yu Chen in Shanghai.

In the latest earnings period, steelmakers recorded their weakest free cash flow for a third quarter since 2015, according to Bloomberg calculations based on 59 steel mills listed on the mainland. Their debt-to-asset ratio, meanwhile, increased to the highest since 2017.

Although the sector’s contribution to the economy has lessened over the years, it was still worth 5.7% of nationwide gross domestic product in 2023, according to an estimate by Gary Ng, senior economist at Natixis SA in Hong Kong. That has implications for the growth targets set by local governments, including the biggest steel producing province of Hebei.

“If we are expecting another harsh winter for the Chinese steel industry, several regional governments may particularly struggle,” said Martina Reber, an analyst at Frontier Commodities in Zug, Switzerland. “Hebei province has already shown signs of significant strain.” 

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The province’s main steel hub of Tangshan is a case in point. Steelmaking accounts for half the city’s economy, but in the first 10 months of last year it was Tangshan’s worst-performing industry after racking up losses of 3.1 billion yuan.

Exports, which helped shore up demand last year, are also facing a decline as importing countries step up anti-dumping measures and tariffs. Domestically, rising usage by manufacturers and carmakers are helping to offset the housing market’s weakness, but they aren’t enough to completely fill the shortfall. 

“The real estate sector must stabilize before we can see a floor to steel demand or production,” said Jinshan Xie, an analyst at Shanghai-based Horizon Insights. 

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This Week’s Diary

(All times Beijing unless noted.)

Monday, Jan. 20:

• China sets monthly loan prime rates, 09:00
• China’s December output data for base metals and oil products
• China’s 3rd batch of December trade data, including country breakdowns for energy and commodities

Tuesday, Jan. 21:

• CNPC’s report on oil and gas markets in 2024, briefing in Beijing at 14:00

Wednesday, Jan. 22:

• CCTD’s weekly online briefing on Chinese coal, 15:00
• Cnooc’s 2025 strategy briefing in HK, 17:00
• CSIA’s weekly polysilicon price assessment

Thursday, Jan. 23:

• CSIA’s weekly solar wafer price assessment

Friday, Jan. 24:

• China’s weekly iron ore port stockpiles
• Shanghai exchange weekly commodities inventory, ~15:30

—With assistance from Qingqi She and Winnie Zhu.

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