Measures like loosening monetary policy and easing financing restrictions in the property sector will cushion but not reverse the downward trend in construction activity and related metals and steel demand.Metals and steel demand from automotive has started to increase again as the car industry has rebounded from several lockdowns and vehicle sales are supported by government initiatives. However, this surge in demand remains shaky in the current economic environment and cannot compensate losses from the construction decline.
Overcapacity remains a problem in the steel sector despite efforts to deal with the issue. About 700 small steel mills, with 140 million tons of steel capacity deemed sub-standard, have shut down since 2016. Another 150 million tons of inefficient capacity at larger firms has also gone. However, steel production continues to climb, outpacing demand.Increasing costs and falling steel prices have eroded the margins of many businesses. According to the NBS, profits in the metals industry decreased 34% year-on-year in H1 of 2022, with profits in the iron & steel segment declining 69%.
The government is pushing steel mills to shift to lower carbon equipment and processes, which adds pressure on liquidity and margins.Payments in the Chinese metals and steel industry take between 60 days and 120 days, and payment behavior has been poor during the past two years. Given subdued demand and late payment from downstream sectors like construction, the number of protracted payments is high.
Metals and steel businesses are often highly leveraged, while banks are reluctant to provide loans. In 2022, double-digit increases in the number of non-payments and business cannot be ruled out. This, together with overcapacities, imbalanced product structures, eroding margins and high gearing has led us to assess the credit risk situation of the industry as “Bleak”.