From the end of 2022, especially when the Chinese government showed high flexibility and abandoned the policy of “zero covid”, positive signs emerged in the global steel and iron ore market. The key question is whether China’s new developments will cause the global steel market to enter a long-term “bullish trend” and experience the previous price ceilings again in 2023?
The fact is that despite the positive developments and the passing of the price floor period in the global steel market, in 2023 the weight of risks is still heavier than the weight of new opportunities. China is the largest producer and consumer of steel in the world, and changes in the patterns of steel production and consumption in this country will quickly affect the world steel market and the price of steel products in all countries of the world. At the end of November 2022, the Chinese government approved a 16-point package to support the country’s mass builders and lift China’s housing sector out of recession. Only one of Beijing’s supportive measures in this expansion package was considering a 91 billion dollar credit line for 12 large mass-producing companies of this country. One third of China’s steel demand is related to the country’s housing sector, and therefore when it comes to analyzing the global price of steel, China’s housing sector is a global sector!
As China deploys expansionary economic policies, it is rapidly moving towards the end of 2022 and early 2023 to abandon the strict restrictions that collectively constituted the “Zero Covid” policy. The policy of stimulating demand in China’s housing sector and the freedom of movement and movement of people through the reopening of borders, parks and public places will increase the demand for steel in Asian markets on the one hand, and will result in an increase in trade on the other hand. This is a positive factor for the global steel market in 2023, and so far it has followed the relative growth of prices compared to the fall and summer of 2022; But as we will argue further, this factor alone cannot create a bullish supercycle (or a long-term “bull trend”) in the steel market.
China’s economic dilemma
Today’s China is the product of 4 decades of rapid development. In this development, the biggest wave of human migration in one country in the history of mankind took place, and hundreds of millions of Chinese migrated from villages to cities at the same time as China’s industrialization. According to World Bank statistics, in 1980, only 19.4% of China’s population lived in cities, but in 2021, the rate of urbanization in this country will reach 65%! This huge migration along with industrial development greatly expanded the demand for housing in China and a period of several decades of growth of the housing sector in China was formed.
Can China’s housing sector grow at the same rate as before? According to the Oxford Economics consulting company, the demand for housing in China was 8 million units annually from 2010 to 2019, and it is estimated that by 2030, this demand will be 4.6 million units annually. There is no longer that huge migration in China, and it is natural that after decades of rapid growth, China’s housing sector will lose one of its driving engines. In addition, China’s housing sector is also plagued by the problem of over-investment or over-investment: 65 million empty apartments in China are a sign of this over-investment. A big bubble has also formed in China’s housing sector, so that according to Oxford Economics, the price of newly built residential units in China is 8.5 times the average household income in this country. This ratio was 5.8 times in America in 2007 and before the housing bubble burst. Chinese President Xi Jinping had the dangers of this bubble in mind when he said in 2016 that “housing is for living, not speculation.”
The predicament of China’s economy is that the aggressive and excessive injection of liquidity into the country’s housing sector will make the bubble bigger and the crisis in the real estate sector more severe. This is why some large Chinese construction companies are in crisis from the fall of 2021, and the Chinese government has doubts about the extent of their support.
All in all, China’s economic growth rate in the coming years will not have the previous momentum, and the country’s economic growth will rely more and more on the creation of debt and the long return of investments. With these arguments, the contribution that China’s new expansion policy will make to the global steel market will be limited, and China’s distancing from the “zero Covid” policy alone will not cause the steel market to experience a long-term boom.
From the war in Ukraine to the increase in interest rates
The war in Ukraine and Russian sanctions in 2023 will continue to disrupt the production and supply chain of commodities. European demand will continue to be low, and the policy of increasing interest rates by central banks in the world’s major economies will cause global demand for commodities, including steel, not to experience significant growth. For the steel market, the situation will be even more complicated than for other goods, because many of the major steel producers in the world, such as China, India, Russia, Turkey, and Iran, have a surplus of steel production, and therefore the competition of these countries will continue to be intense in the export markets. . In 2022, the European market contracted and some manufacturers such as Russia, Turkey and India shifted their gaze from Europe to the Middle East and North Africa.
All these cases show that in 2023, the probability of a large and long-term growth of prices in the global steel and iron ore market is small. If we want to use the interpretation of financial market experts, probably in the total of 12 months of 2023, the global steel market will display a view of a range-bound market; That is, a market where prices have “sideways movement”.
