Ratings agency, ICRA, in its latest research on the steel sector, said that Chinese steelmakers could brace for an extended period of weak domestic demand as the economy goes through the process of rebalancing of an overheated property market, which was a key growth engine driving the country’s steel demand for the last two decades.
To prevent the housing market from overheating and to mitigate broader systemic risks to its economy, the Chinese Government introduced the Three Red Lines, which put in place a mechanism to prevent the piling up of excessive borrowings on the balance sheet of property developers.
On September 23, 2021, after struggling to shore-up liquidity for over a year since the rollout of the Three Red Lines, the Chinese Evergrande Group, one of the leading Chinese property developers, missed a $ 83.5-million coupon payment on its offshore bond liabilities. Given the investor’s flight to safety, three more Chinese property developers failed to raise capital and defaulted on debt payments in the subsequent month of October 2021.
Elaborating on this, Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said, “The Three Red Lines effectively put in place a check to reign in new housing supply in China. Directly and indirectly, real estate related activities reportedly contribute around 25-30% to the Chinese GDP and around 30% to the Chinese domestic steel demand.
On the export front, in FY2021, China emerged as the single largest importer of steel from India, reaching a high watermark of over 5 million tonnes (mt), supported by the strong demand undercurrents flowing through key steel consuming sectors. However, with the Chinese steel demand growth waning down in the current fiscal, share of steel exports to China by Indian mills have plummeted to just 8% in H1 FY2022 from 30% in FY2021. This, along with the rising trend in Chinese steel exports, which has increased by 31.3% year-on-year during H1 CY2021, suggests that competition in the export markets between Indian and Chinese mills could intensify going forward. It is noteworthy that this growth is being seen after a gap of five years (CY2016 to CY2020), during which China’s steel exports had declined continuously.