Steel demand in China has already stagnated because of the downturn in the real estate industry. Recently, droughts leading to power cuts have added to the difficulties of the Chinese economy.
Many people think that after being devastated by the COVID-19 pandemic in the past few years, China's steel market recovers. However, new challenges are emerging, hindering the industry both in the short and long term.
Power cuts to save energy and falling demand because of the real estate crisis are holding back the growth of the steel industry. Worse, supplies of vital raw materials such as coking coal and iron ore are also being disrupted.
The future outlook looks bad, oilprice.com said. This can be clearly seen from the recent statement of Mr. Li Ganpo - founder and chairperson of Hebei Jingye Steel Group.
At a meeting a few weeks ago, Mr. Li warned that nearly a third of China's steel mills could go bankrupt. If this forecast comes true, the steel supply chain is at risk of being severely disrupted.
Many industries experts have lost hope of a turning point soon. This pessimistic sentiment has been showed in many reports from China over the pastime.
The real estate crisis affects not only real estate developers and steel producers, but also banks.
When it was still one of the largest steel production and consumption markets in the world, steel mills in China used to produce over 1 billion tons of steel. This production accounts for about half of the total global production.
Now, everything seems to be an old and distant memory. The slump in China's steel industry has also affected iron ore prices and even supply mines in Brazil and Australia.
Iron ore, Australia's biggest export, is facing supply chain threats because of the collapse of China's steel industry.
Experts predict that the price of ore will fall by 50% in 2023, as the real estate market in China continues to decline. Consumers will then not buy a new home or cannot repay their mortgage.
Recently, the People's Bank of China (PBoC) announced several measures to support the economy, such as lowering the 5-year mortgage prime lending rate and the one-year basic lending rate.
However, these moves are late. According to oilprice.com, analysts believe that the situation of the economy and the steel industry is unlikely to improve in the second half of 2022.
Steel mills were once at the forefront of China's economic expansion. However, now economic conditions have deteriorated to where many steel mills are on the verge of shutting down due to lack of customers.
To complicate matters further, a heat wave in many parts of China forced local governments to cut off electricity. This resulted in steel mills having to suspend operations. About 20 steel mills in the southwest of China have temporarily closed in the past few weeks.
It wasn't until the middle of last week that Beijing announced stimulus measures estimated to total $1 trillion to boost the overall economy.
However, stimulus measures such as infrastructure spending often have a lag of 6 to 9 months from the time the stimulus is announced and when they have a real impact on the economy. Steel demand is likely to remain subdued for at least a few more months.