Weak demand and high costs accelerate market rebalancing in China's steel sector

The slower than expected global economic recovery and ongoing volatility in commodity prices continued to shape the outlook for China's steel market in May 2026. During the month, steel prices initially increased before later decreasing. Although steelmakers remained profitable for a second consecutive month, profitability weakened significantly. Total industry profits during the first five months of the year decreased by more than 30% compared with the same period last year.

Steel producers continued to reduce output in a controlled manner to maintain profitability. Lower crude steel and pig iron production helped limit supply side pressure caused by weak demand, while high raw material costs continued to weigh on the industry. Production costs reaching nearly 95% of total revenue kept profit margins at very low levels.

On the demand side, the divergence between the manufacturing and construction sectors became more pronounced. The ongoing slowdown in the real estate sector and tighter fiscal policies limiting local government borrowing reduced infrastructure investment, weakening demand for long steel products, particularly rebar. In contrast, expanding production in the new energy, machinery and equipment, shipbuilding and home appliance sectors continued to support demand for flat steel products.

Market participants expect construction activity to slow further during the seasonal slowdown in June and July due to hot weather and heavy rainfall. This is expected to put additional pressure on long steel prices and lead to higher inventory levels. Meanwhile, government support measures and the stable performance of the manufacturing sector are expected to keep demand for flat steel products relatively resilient, further widening the price gap between long and flat steel products.

Overall, the market indicates that China's steel industry is entering a structural rebalancing phase. During this transition, producers are expected to reduce the share of low margin products and focus more on higher value added steel products, a strategy that will be critical for achieving sustainable profitability.