Analysis: China's steel production growth in line with domestic real estate demand

China's apparent steel consumption rose 8.9% year-on-year to 526.76 million tonnes in January-July and will be robust enough to cope with the rise in steel production this year, according to S&P Global Platts estimates.

Consumption growth has been growing in tandem with the start of new real estate developments, suggesting that strong domestic demand has been the main driver of steel production growth this year.

China's relaxation of environmental restrictions on manufacturing, along with expanding steel production capacity, also boosted steel production by about 10% by 2019.

Real estate construction accounts for over 30% of China's steel consumption and is the largest driver of steel demand. This sector is expected to slow down for the remainder of 2019, but so too will the growth rate of crude steel production.

As a result, supply and demand for steel will remain balanced, while production margins will decline due to the high levels observed in 2018. Iron ore prices also corrected to below $ 90 /t CFR after hitting a five-year high of $ 126. /ton in July, which will also help the steel margin.

The slower growth rate for new properties in 2019 is in line with market expectations after land purchases and home sales declined 29.4% and 1.3% year-on-year, respectively, in January-July 2018. Slower new housing growth, however, is not expected to have a negative impact on steel demand - although it may appear weaker than last year, 2018 was particularly strong.

The decline in land purchases and home sales is mainly due to the fact that demand from home buyers has been pushed back to 2015-2018 due to Beijing's monetary and tax incentives.

On the supply side, China's annual steel production growth rate slowed to 9% in January-July, from a peak of 10.2% in January-May. The drop in production was mainly due to increased production cuts to improve air quality in northern China in June and July.

Ahead of China's National Day on October 1, the pace of production will also be reduced, which this year will be more significant than ever as the 70th anniversary of the People's Republic of China is celebrated. Local governments in northern China will be ordered to cut back on industrial activities, including steel production, to ensure a blue sky over Beijing in a landmark event.

China's steel production in 2019 not only exceeded but also caught up with strong steel demand from the real estate sector�