Chinese metallurgy sector expects recovery in demand

China's steel production and prices in 2023 will be driven by the level of recovery in demand compared to 2022, with investment in infrastructure unlikely to pick up and demand outlook in the real estate sector remaining uncertain.

China's gross domestic product (GDP) growth is expected to reach 5.1% in 2023, said Feng Ximing, director of the macroeconomic think tank at the Chinese Academy of Social Sciences. The country's economy grew by 3% in the first three quarters of 2022 against a target of 5.5% for the year. China's crude steel production fell 1.4% year-over-year to 935.11 million tonnes in January-November 2022. The government has not announced any targets to reduce steel production during the winter months of November to March. The market sees the lack of government-mandated cuts as a response to weak steel demand that hit production in 2022.

The outlook for the real estate sector is uncertain
According to the National Bureau of Statistics (NBS), China's infrastructure investment increased by 8.9% compared to January-November 2022. Market participants expect annual investment to grow by more than 10% compared to 2021 and fall to around 8-10% compared to 2023.

Growth risks to the real estate sector could ease in 2023 as pending projects are likely to be completed following the stimulus measures announced by Beijing in November. But the launch of new projects that are critical to steel demand remains uncertain for 2023.

China's real estate investment fell to a 30-year low in 2022, with all major real estate market indicators negative. According to the World Steel Association in October, the area under construction has decreased for the first time in modern history. According to NBS, investment in the real estate sector in January-November fell by 9.8% compared to the previous year. The sector slowed down due to the tightening of mortgage lending quotas from the second half of 2021 and the subsequent loss of consumer confidence in this sector as the preferred sector for investing their savings. Real estate and infrastructure accounts for about two-thirds of China's steel demand.

Covid policy changes and stimulus push
Since November, China has introduced measures to ease restrictions on the movement of people.

Specifically, the country has allowed home quarantine for people with no or mild symptoms, as opposed to the previous requirement for quarantine in a government-designated facility. The use of public transport has also been exempted from the Covid-19 testing certificate.

The People's Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly adopted 16 measures in November to support the "stable and healthy development" of the real estate sector. Key measures to support the sector include improving access to bank credit, equity financing and bond issuance. The notice was the first time this year that the central government officially announced support for the real estate industry, rather than informally at meetings. Steel prices rose after the announcement. Argus _ On December 14, China's fob hot-rolled steel index stood at $577/t, up 11% from November 14, but down 25% year-on-year. Stimulating real estate and easing Covid-related restrictions are likely to support the Chinese economy in the second half of 2023. This is as demand could come under pressure from rising Covid-19 cases in the first half, while consumer confidence in the real estate sector will only return with stronger signals from the government that it is committed to supporting the growth of the sector.