China's steel sector is softening, but with resilience

LAUNCESTON, Australia, Jan 21 (Reuters) - There are two ways of looking at the 1.7% decline in China's steel output last year.

The first is that it confirms that the world's largest producer of the key industrial metal is now in an established downtrend, and further weakness is likely this year.

The second is that the steel industry is actually remarkably resilient in the face of major economic challenges, and that output has been essentially flat at extremely strong levels for the past five years.

Both are essentially factual, and reflect the classic glass half-full or half-empty dilemma.

On the half-empty side of the ledger is the fact that China's steel production peaked at 1.065 billion metric tons in 2020, and has trended lower since then, with 2024 output coming in at 1.005 billion tons.

But another way to look at China's steel output is that it has been within a 70 million ton range between 2019 and 2024, which is actually quite a stable performance.

Perhaps the best way to characterise China's steel production is that it likely has peaked, but the decline so far has been gentle, and output remains relatively high despite the well-publicised struggles of the world's second-biggest economy since the COVID-19 pandemic.

The question then becomes, what is the likely trajectory for China's steel sector in 2025? Similar to other markets, the answer remains unclear and subject to factors yet to come into play, chief among them what trade tariffs are put in place by the new administration of U.S. President Donald Trump, who resumed the office on Monday.

It's also uncertain as to whether 2025 is the year China's struggling residential property sector gets back on its feet, or whether it remains hostage to weak developer balance sheets and consumer wariness.

A third factor is what will happen to China's steel exports in 2025, after they hit a nine-year high of 110.72 million tons in 2024. This was up 22.7%, or just over 20 million tons, from the previous year, with the increase helping to offset some loss of domestic consumption for steel mills.

BEST-CASE SCENARIO

The best-case scenario for China's steel sector this year is one where trade tariffs aren't too punitive, the domestic economy continues to regain momentum and construction activity stabilises, or perhaps even increases.

Under such a scenario, the best outcome for China's steel production would be steady output around 1 billion tons. This also means that China's demand for iron ore is likely to remain steady as well, although it may ease from the record high of 1.24 billion tons in 2024.

This is largely because much of the 4.9% rise in imports, which was equivalent to 57.5 million tons, went to replenish stockpiles rather than meet increased demand for the key steel raw material.

Port inventories monitored by consultants SteelHome ended last year at 146.85 million tons, up 32.4 million from the 114.5 million at the end of 2023.

It's unlikely that stockpiles will rise again strongly in 2025, which is likely to limit iron ore imports, although if the downward trend in prices of 2024 extends into this year, traders may be tempted to take advantage of cheaper supplies.

The volume of Chinese steel hitting global markets has led to some consternation among countries such as India, which is trying to boost the pace of expansion of its own steel sector.

This raises the possibility that China may find it harder to increase steel exports in 2025. But it is worth noting that not all importing countries are opposed to buying more steel from China, especially those without a domestic steel sector.