Market-driven Chinese production cuts may start to materialise in the fourth quarter, failing which mandated production cuts will likely be enforced, according to Macquarie.

Its Chinese crude steel production forecast for 2023 remains little changed, at 1.5% on-year growth.

The financial services firm says mills may reduce output on higher raw material costs, already-high visible inventories in flat steel products, plus its expectation that exports will eventually fall given the export arbitrage has narrowed significantly. This comes after domestic producers have suffered from weak and often negative margins throughout the year.

“Domestic steel consumption has not been as week as macro headlines would suggest, particularly around the struggling property sector,” Macquarie says in a report sent to Kallanish. Chinese domestic demand is forecast to inch up 0.5% in 2023.

Though long steel apparent consumption has been weak, declining 6%, it has far-outperformed developer new start data, which stood at -25% on-year year-to-date in July. Instead, long steel demand has better reflected total construction starts, which declined 10% on-year in the first half. Other sectors, including shipbuilding, have also helped to offset the weakness in construction, Macquarie observes.

While China's total exports have been on a downtrend, exports of steel-intensive products have remained robust, providing support to domestic steel consumption via indirect exports. This includes appliances – Macquarie forecasts steel consumption from the sector to increase by 12.6% this year. In the automotive sector, all of the 7.4% on-year production growth through July can be accounted for by a 74% rise in exports.

Chinese direct steel exports have nevertheless risen 28% on-year in the eight months through August, driving most of China’s output growth.

In 2024, Macquarie forecasts China crude steel production growth of 1% on-year, with a slowing annual growth rate thereafter. Domestic steel demand should increase 2.1% – including positive, albeit small growth from construction, as high frequency leading indicators are pointing to a likely lift in property sales. However, weaker export demand for both finished steel and manufactured products will partially offset this.