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Steel City: Destocking Slowdown on Shanghai Steel
In May, crude steel production reached its peak, but the pressure on inventory reduction in the real estate sector remained intense. Amid oversupply and growing market tensions, rebar demand is expected to remain weak.
During May, steel output hit a seasonal high, with daily average production increasing since early April. Not only did it return to levels above 2.1 million tons per day at the start of the year, but it also set a new record of 2,280,200 tons per day in mid-April—a 7.8% year-on-year increase. According to Mysteel data, blast furnace utilization in Tangshan surged by 3.56 percentage points to 91.86%, marking the highest level since late January. This surge in steel production and rising blast furnace utilization rates are closely linked.
According to the China Steel Association, the country's crude steel output in the first quarter totaled 18.332 million tons, up 1.8% year-on-year. In the first half of April, total crude steel output reached 44.317 million tons, a 4.53% increase compared to the same period last year. If April’s output had remained flat from the previous year, the average daily production in the second half of the month would have needed to reach 1,936,700 tons—already below the typical 2 million ton/day level for this time of year. Given that blast furnace utilization remained high in late April, we expect that April’s output was higher than the same period last year. Looking at historical trends, May is typically the peak month for steel production, and this year’s output is likely to continue rising.
Inventory reductions slowed down or even further decelerated. Over the past eight weeks, wire rods and rebar accounted for 75% of the total steel stock reduction, while hot rolled coils contributed 16%, medium plates 5%, and cold rolling 4%. This highlights the strong seasonal demand for construction materials. Moreover, the decline in both wire rod and rebar inventories exceeded the eight-week reduction seen during the seasonal peak last year, indicating that construction demand this year has been stronger than in the same period last year.
However, it's worth noting that the rate of rebar destocking has gradually slowed in the past two weeks, dropping from a historical high of 81,000 tons to 67,000 tons. According to National Bureau of Statistics data, in the first quarter, except for an increase in construction area, new starts, completed areas, and sales all showed negative growth. We believe that the slowdown in rebar inventory may continue to slow further.
In March, the commercial housing stock turnover ratio reached 5.4 months, and the residential stock turnover ratio was 4.1 months—an increase of 0.5 months from February and the highest since 2012. This indicates increased pressure on real estate inventories in the first quarter. Looking at the four-week moving average of commercial housing transactions in 30 major and medium-sized cities, transaction volumes in first-, second-, and third-tier cities declined steadily in April, suggesting that real estate destocking remained weak.
We observed that the sources of real estate development investment have grown faster than actual investment. In the first quarter, the total funding for real estate development increased by 6.6% year-on-year, a decrease of 5.8 percentage points from the previous two months—the lowest since July 2012. Meanwhile, cumulative real estate development investment rose by 16.8% year-on-year, declining by 2.5 percentage points from the previous two months—the lowest since December 2012. The growth of domestic funds (including bank and non-bank financial institutions), self-raised capital, and other funds (such as deposits, advance payments, and personal mortgages) has slowed. "Other funds," which account for 40% of the total, saw their first negative growth since June 2012, decreasing by 1.9% year-on-year. This confirms the sluggish sales of commercial housing in the first quarter.
Under the backdrop of warnings from the central bank and the China Banking Regulatory Commission regarding real estate risks, banks and non-bank financial institutions may continue to tighten credit for real estate, further shrinking the sources of funding for real estate development and investment. As a result, real estate development investment is highly likely to continue slowing down in May.