The world’s top steelmaker has added its voice to the growing sense of alarm among China’s mills over crisis conditions in the industry due to poor demand and plunging profits. 

China Baowu Steel Group warned of headwinds due to a “complex macro economy” and the severe impact of Covid flareups across the country, according to a posting on the group’s WeChat account. Weak demand, falling prices and declining profitability are causing “great challenges” for the sector and testing the group’s production and operations, it said.

In a meeting on Wednesday, senior Baowu managers asked subsidiaries to cut back on operations that aren’t profitable, and to keep sufficient cash to avoid liquidity crunches, according to a person familiar with the matter. They also asked the units to minimize costs by seeking lower fees from banks and for other services, said the person.

Baowu, China’s national steel champion created by the merger of Shanghai Baosteel Group and Wuhan Iron & Steel Group in 2016, has been expanding by acquiring smaller peers since 2019. Its operations now span the western Xinjiang region to the eastern province of Shandong, producing 120 million tons last year, according to the World Steel Association. 

But many of the units are struggling with weakened demand, said the person, who asked not to be identified as the information is private. China’s steel industry broadly has been battling low margins amid massive competition in the domestic market as the economy slows.

Baowu didn’t immediately respond to a request for comment.

Property Woes

Other mills have raised similar fears in recent weeks, but the warning from China’s flagship producer is likely to resonate with policymakers as they seek to revive the economy and shore-up the nation’s flailing property market, which is central to steel consumption. China is the biggest producer and consumer of the alloy, globally.

The government has promised a massive push on infrastructure spending to rescue growth, but Baowu’s pessimism seems to indicate a lack of conviction that the stimulus will deliver enough of a boost to construction and steel demand. 

Meanwhile, the slump in the real-estate market is worsening after a wave of mortgage boycotts due to unfinished housing, which, along with Covid restrictions, is likely to drive steel output lower in the second half, according to a note from Bloomberg Intelligence analyst Michelle Leung. Property and infrastructure have typically accounted for more than half of China’s steel demand.

Certainly, the property side of that equation is getting the most focus at the moment.

“Since 90% of residential property sales in China are of uncompleted units, a perception that developers cannot be trusted to finish construction will make people more unwilling to buy new housing, creating an even bigger problem in real estate,” Andrew Batson, research director at Gavekal Dragonomics, said in a report.