In Tokyo, prices of industrial materials, including ferrous and nonferrous metals, are experiencing a sharp decline due to concerns over a slowdown in the Chinese economy, which has resulted in a surplus of supplies. These prices had been steadily increasing since the end of the previous year in anticipation of an economic recovery after China dropped its zero-COVID policy. However, with mounting fears of a decelerating growth rate in China and the potential for an increase in Chinese exports from producers with excess supply, global prices are being depressed. The Shanghai Commodity Futures Exchange listed a five-month low for hot rolled coils on Wednesday, dropping to 3,928 yuan ($568) per tonne. As hot-rolled thin steel plate is fundamental to the production of building components and industrial machinery, it serves as the benchmark for steel prices in China, and the decline in its price indicates a weakening of the local steel market.
The prices of chemical products and nonferrous metals are experiencing a decline as well. The international zinc index has dropped 20% since reaching its peak in January. Aluminum prices have also fallen 10% from their mid-January highs. Additionally, Asian prices for vinyl chloride, a crucial construction material, have decreased by 6% from their highs.
In anticipation of an economic resurgence following the lifting of China’s strict COVID-19 lockdowns, upstream basic material producers have been increasing production. China’s record-high iron ore imports of 294.34 million tonnes in the first quarter of this year represented a 10% increase compared to the previous year. Furthermore, China’s crude steel production rose by 6% to 261.6 million tonnes.
However, according to China’s National Bureau of Statistics, manufacturing and other sectors’ capacity utilization in the first quarter was 74.5%, 1.3 percentage points lower than for the entire year of 2020. Although real gross domestic product increased by 4.5% year-on-year, which exceeded market expectations of 4.0%, the recovery of consumer durables and other goods was not as strong as anticipated.
The weak construction sector, which is the main driver of steel demand, also contributed to the decline, as investment in real estate development fell 5.8% in the quarter.
Hopes for increased demand for industrial materials were further dampened after the National People’s Congress failed to introduce a significant real estate stimulus package in March. According to the Marubeni Research Institute, China’s crude steel production minus consumption in the first quarter resulted in a surplus of about 27.14 million tonnes, the highest level in two years.
“The excess supply of steel is causing a downward trend in prices,” commented senior analyst Li Xuelian of the institute.
This oversupply of steel is being exported out of the country, with China’s steel exports totaling more than 20 million tonnes in the January-March quarter, an increase of 50% from the previous year.
The oversupply of inexpensive Chinese steel is posing a threat to steelmakers in other countries. Currently, almost 20 cargo ships carrying Chinese steel products are anchored offshore near the Japanese port of Funabashi, as the warehouses that store imported steel are full and ships cannot unload. A steel wholesaler predicts that the number of waiting vessels will increase even more during the upcoming holidays.
A similar situation occurred around 2015, when the Chinese economy was experiencing a downturn and Chinese steel products flooded the market, leading to a decline in global steel prices. It seems history is repeating itself. Given that China accounts for half of the world’s demand for steel and nonferrous metals, any negative impact on its economy can have far-reaching effects on the global economy.
