China's steel industry remained under significant earnings pressure in the first half of 2026, with production cuts helping stabilize profitability only marginally as weak demand and high costs continued to weigh on the sector.
Although the ferrous metal smelting and rolling industry remained profitable for three consecutive months in April-June, overall profitability deteriorated sharply from a year earlier. The industry's path to earnings recovery remains prolonged as the market continues to grapple with weak construction demand, uneven manufacturing activity, and persistent pressure on steel prices.
Profits fall despite lower output
China's ferrous metal smelting and rolling industry generated revenue of RMB 3.68 trillion ($513 billion) in January-June, down 0.6 percent year on year. Operating costs declined at a slower pace, falling 0.4 percent to RMB 3.50 trillion ($488 billion), while total profits dropped 25 percent to RMB 31.77 billion ($4.4 billion), a decline of RMB 14.51 billion ($2 billion) from the same period last year.
Monthly data showed some improvement. Industry profit reached RMB 13.6 billion ($1.9 billion) in June, up RMB 3.01 billion ($420 million) from May, although it remained RMB 990 million ($138 million) below June 2025 levels. The month on month improvement is unlikely to reverse the broader downward trend in profitability.
The industry has increasingly relied on production discipline to protect margins. China's crude steel output totaled 500 million mt in the first half of 2026, down 3 percent year on year, while pig iron and finished steel production also declined. Output contracted across most steel product categories, with cold-rolled sheets, welded pipes, and ferro alloys among the few exceptions.
Despite lower production, average profit stood at only RMB 64/mt ($9/mt) during the first half, up RMB 20/mt ($3/mt) or 45 percent from the previous quarter but down RMB 26/mt ($4/mt) or 29 percent from a year earlier. Such narrow margins remain insufficient to offset rising operating pressures.
High costs continue to squeeze margins
Raw material costs remained the biggest constraint on profitability. Operating costs accounted for 95.2 percent of industry revenue during January to June, 0.2 percentage points higher than a year earlier and only marginally lower than the previous quarter.
Profitability indicators also weakened. The industry's cost-to-profit ratio stood at 0.91 percent, while the sales profit margin reached just 0.86 percent Although both improved slightly from the previous quarter, they declined by around 0.4 percentage points year on year, highlighting weaker earnings across the sector.
Pressure was even more evident among China's key steel producers. Their crude steel output declined 3.7 percent year on year to 408 million mt during the first half. Despite cutting production more aggressively than the industry average, the reduction failed to generate a meaningful recovery in profits.
Weak demand weighs on steel prices
The industry's weak profitability could be primarily attributed to structural and seasonal weakness in steel demand, which has limited any meaningful rise in steel prices despite lower output.
Domestic steel consumption remains increasingly divided between manufacturing and construction. Manufacturing demand has shown greater resilience, while construction continues to face sustained pressure.
The property sector remains the largest drag on steel consumption. Developers continue to show limited appetite for land acquisitions and new project starts, while the recovery in project completions has fallen short of expectations, keeping steel demand under pressure.
Infrastructure investment has also yet to provide sufficient support. Although local governments continue issuing special-purpose bonds, delays between project approval, funding disbursement, and construction mean physical steel demand has yet to materialize at a scale capable of offsetting weakness in the property market.
Manufacturing demand is also uneven. Traditional sectors, including construction machinery and steel structures, have entered their seasonal slowdown, reducing steel consumption. By contrast, emerging industries such as wind power, energy storage, offshore engineering, new energy vehicles, and high-end equipment continue to support demand for flat steel products.
However, steel consumption from these emerging industries remains too small to compensate for declining demand from traditional sectors or lift the broader market.
Seasonal weakness adds further pressure
Market conditions weakened further after the industry entered its traditional off-season in July.
Persistent rainfall across southern China, high temperatures in northern regions, and typhoon disruptions slowed outdoor construction activity. End-users continued to purchase only as needed while maintaining low inventories, leaving spot market trading subdued and increasing inventory pressure for distributors.
The market was caught between firm raw material costs and weak downstream demand. Previously elevated iron ore and coke prices had provided cost support for steel prices, but weak end-user demand continued to limit price gains. At the same time, widespread losses among steel mills have encouraged further production controls.
More recently, however, raw material prices have started to soften. Coke has already undergone two rounds of price cuts, with expectations for further reductions, while iron ore prices have also weakened.
Although lower raw material costs help ease cost pressures for steelmakers, they also pull down finished steel prices, creating a negative feedback loop of falling costs and weakening steel prices that continues to slow profit recovery.
Outlook
China's broader economy continues to show resilience, supported by steady industrial production, expanding foreign trade, and growth in emerging industries. However, external uncertainties remain, while the domestic imbalance between strong supply and weak demand has yet to be resolved.
Macroeconomic policy is expected to continue focusing on stabilizing growth through stronger counter-cyclical measures, support for domestic demand, industrial upgrading, and the expansion of emerging industries. Policy support is expected across the property, infrastructure, and manufacturing sectors.
Nevertheless, the steel industry's near-term operating environment is unlikely to improve significantly. Steelmakers are expected to prioritize production discipline, safeguard marginal profitability, adjust output flexibly, expand higher-value products such as high-end plate and specialty steel grades, and tighten raw material procurement and inventory management.
In the longer term, a sustained recovery in industry profitability will depend on a meaningful revival in demand from the property and infrastructure sectors alongside continued growth in new energy and high-end manufacturing. Until supply and demand rebalance more fundamentally, the industry is likely to remain characterized by low margins and continued production controls.
Source: BigMint
