China's steel slump to hit smaller firms harder

Concerns are growing as demand for China’s steel sector slows after decades of growth. The world’s largest miner, BHP Group Ltd., and its largest iron ore buyer, China Baowu Group Ltd., have both highlighted the challenges ahead despite making relatively healthy profits. BHP’s CEO Mike Henry pointed to China’s struggling real estate sector and uneven economic recovery, while Baoshan Iron & Steel Ltd. reported stagnant steel consumption.

Steel demand in China has fallen more than 10% since 2020, marking the end of a long period that previously brought significant profits to major iron ore producers like BHP. The situation has worsened recently as China’s housing crisis continues, pushing steel prices to low levels. This has led to fierce competition between mills both domestically and internationally. Baoshan Iron & Steel said the sector was struggling with strong supply but weak demand and high costs but low prices. The company expects oversupply to continue in the second half of the year.

BHP, which produces 260 million tons of iron ore a year, has seen iron ore prices fall by more than 25% this year. Despite the challenging environment, BHP believes China’s steel production has stabilized at over 1 billion tonnes and is likely to remain there until 2025.

While both BHP and Baosteel have avoided the worst effects of the steel sector downturn so far, the situation has deteriorated significantly since July. BHP’s iron ore earnings increased by 13% in the financial year ending in June, while Baosteel’s net income was flat in the first half of the year. However, industry experts warned that Baosteel’s first-half profit margins could be unsustainable in the financial quarter and pose risks to the company’s full-year earnings.

Despite the challenges, large iron ore producers such as Baosteel and BHP are likely to outperform smaller rivals because of their scale and lower costs. Higher-cost miners are expected to shut down production when prices fall below USD 100 a ton, a level recently breached. Meanwhile, the most severe effects of China's steel slump will likely be felt by smaller, private mills. Other major Chinese steelmakers, such as Maanshan Iron & Steel Co. Ltd. and Hesteel Co. Ltd., are set to report first-half earnings this week.