Global crude steel production totaled 161 MMT in March, decreasing by 5.8% YoY off a high base in 2021. This was largely driven by a fall in Chinese production. Chinese steel output totaled 88 MMT in March, down 6.4% YoY. This brings total production for the first quarter to 243.4 MMT, down 10.5% from the same period in 2021. Ongoing lockdowns in the country have caused disruptions in transporting raw materials, namely coal and iron ore, from ports to steel mills hampering production. Meanwhile, the country’s property sector remains suppressed, driving a similar decline in demand. Any rebound in production will be limited by the continuation of emissions regulations, with the state planner last Tuesday announcing the country will target output below 2021 levels in 2022.

Production outside of China totaled 72.8 MMT in March, a decrease of 3.9% YoY. EU production declined 8.5% YoY, totaling 12.8 MMT. North American production fell by 2.8% YoY, totaling 9.7 MMT, while Japanese production fell by 4.3% YoY, totaling 8 MMT. Mills have struggled to absorb high energy and raw material costs, forcing many mills to limit output. India was a notable exception to the broad-based decline in global steel production, with March output amounting to 10.9 MMT, increasing 4.4% YoY. India’s government has been working to encourage increased output, with a target of 300 MMT of annual domestic steel capacity by the 2031 April-March. India produced 120 MMT of crude steel in FY21, rising by 16.5% YoY.

Iron ore and coking coal prices have fallen sharply, as the threat of further lockdowns in China, a lack of significant stimulus measures from China’s central bank and a weakening yuan have stoked demand fears. On China’s Dalian commodity exchange, the most-traded September iron ore futures contract fell by 10.7% in Monday trading, closing at 794.5 CNY/tonne. The September hard coking coal futures contract fell 5.8%, closing at 2,860 CNY/tonne.

Covid-19 continues to pose a threat to steel demand in China. An end to Shanghai’s lockdown does not appear any closer, while new cases in Beijing have triggered mass Covid testing in 10 districts and localized building lockdowns, prompting concerns of the implementation of restrictions like in Shanghai. Aggressive stimulus measures by China’s central bank in response to these outbreaks remain unlikely. While the PBOC announced it would take measures to assist small and medium sized firms and maintain liquidity in financial markets, it also reiterated that a cautious approach would be taken to maintain price stability.

Higher import costs due to a weakening currency have also hit demand. The yuan has fallen more than 3% against the US dollar in the past month, driven by an inversion of China-US interest rates and the threat of further Covid measures. On Monday, the currency hit a one-year low against the dollar of 6.5775. In response, the PBOC announced it would lower banks’ FX reserve ratio requirements by 100 basis points to 8% from 15 May.