China’s manufacturing production index of steel consumption produced by S&P Global Platts stood at 112 points in September, 2 points higher than in the same period of 2020. Meanwhile, output of manufactured goods linked to construction and consumption sectors, such as vehicles, home appliances and excavators, all remained below year-ago levels.
The index is based on China’s National Bureau of Statistics production data for 17 steel-related manufactured goods, which are categorized into seven sectors and weighted according to their share of steel consumption. The monthly production average in 2018 is used as the baseline of 100.
Some market sources expect steel demand in the manufacturing sector to stay sluggish through at least the rest of 2021, as slowing property construction might further dent the manufacturing of engineering machineries, while sporadic occurrences of local COVID-19 cases had also slowed the consumption recovery.
Demand outpaces supply
While the overall steel-intensive manufacturing output in September was still higher than in the same period in 2020, flat steel supply dropped below 2020 levels, partly as steel mills had to cut output to keep their 2021 steel output within 2020 levels, and partly as power crunch affected steel production across China.
The output of medium-wide hot-rolled coil – an indicator for the flat steel sector – in September declined 9.2% on the year to 14.18 million mt, according to latest data from the NBS.
As a result, the domestic HRC sales profit margin averaged $136/mt in September, up from $29/mt during the same period in 2020, according to S&P Global Platts Analytics.
Margins weaken in October
However, the HRC profit margin declined in October, as the market expected steel output to recover but demand to remain sluggish in the coming months. As of Oct. 21, the HRC sales profit margin has declined to $120/mt.
Some market sources said China’s flat steel production in October might actually stay as low as in September. However, they expect steel output to rebound, especially in December, as most steel mills should have completed their output cut requirements by November and power crunch should have eased from current levels.
Moreover, it remains to be seen whether winter steel output cuts in northern China will be implemented strictly, as steel mills might need to keep up operations to support residential heating if power shortages persist.
However, on the demand side, construction- and domestic consumption-related manufactured goods are unlikely to gain traction in the near term. Also, overseas demand for Chinese goods could soon taper in tandem with the recovery of overseas operations, sources said.
In September, production of machineries for metals smelting, cutting and forming, as well as the container and railway transport sectors saw year-on-year growth, contributing the most to the manufacturing production index’s rise. A pullback in overseas demand could dent at least some demand for machineries and containers, some market watchers said.
China announced on Oct. 22 support for lending to first-time home buyers, a sign that credit to the property sector has eased slightly amid downward pressure on economic growth. Meanwhile, China has been accelerating the issuance of local government special bonds in order to lend support to infrastructure in early 2022.
However, China’s construction activities, together with the need for engineering machineries, are unlikely to see notable improvement till the second quarter of 2022, some market participants said.
Source: Platts