Baosteel warns of steel oversupply in China; demand stable

Shanghai-listed Baosteel said in its 2019 annual report released on Wednesday that China's steel market will face growing oversupply pressure in 2020, while overall domestic steel demand is expected to be stable.

Newly commissioned steel capacity, through capacity swaps, will put added pressure on supply this year, while direct and indirect steel exports are expected to drop sharply, especially in the second-quarter.

Baosteel said during its press conference on Wednesday that the Chinese government's economic stimuli would be focused on boosting investment, rather than on consumption. Therefore, construction and engineering machinery would benefit the most from this, boosting demand for rebar, hot-rolled coil and plate.

Baosteel expects China's property sector to trend downwards in 2020, but infrastructure's fixed asset investment would increase by 7%-11% year on year, up from 3.8% in 2019. Platts understands that Infrastructure will replace property as the main driver of incremental steel demand and the boost to steel demand will be felt more in the second half of 2020 than in the first-half.

Due to the interruptions brought about by the coronavirus outbreak, China's infrastructure FAI dropped 20% year on year in Q1, which means that the annual FAI growth rate for Q2-Q4 will need to be more than 15% to achieve Baosteel’s estimate.

Consumption related sectors, such as auto and home appliances, will be less supported. As a result, Baosteel’s outlook for demand of cold-rolled coil and its downstream products such as hot-dip galvanized coil, is "not optimistic.”

Chinese flat steel consumers' utilization rates in general are currently 20%-30% lower than usual, according to Baosteel. End-users are also facing high steel inventories due to their slow production, which would delay the need to restock. Baosteel said it was currently faced with insufficient CRC orders

The company expects sales of auto and home appliances to improve from Q2, but annual sales are still likely to fall by more than 10% on the year, due to the impact of the pandemic on the global economy. Strong long steel demand and weak flat steel demand would continue through 2020.

-- Analyst Jing Zhang