China’s August steel Purchasing Managers Index (PMI) hit its lowest level since 2015 at 44.9, due to a lower demand, higher production and rising inventories, according to China’s Steel Logistics Professional Committee (CSLPC) latest release.
China’s inventories of five major finished steel products at warehouses in 20 major cities rose 10.3% MoM to 14Mt at the end of August, with rebar showing the highest MoM increase of 17.2%.
In its message, the CSLPC highlighted that the August steel market was impacted by a slowing demand, the escalation of the Sino-US trade friction, and the explicit message from the People’s Bank of China that the “property market will not be used as a short-term economic stimulus means”. Meanwhile, the August sub-index for the country’s steel production rose by 1.6 basis points to 50.1 after having been below the 50 mark during the previous two months.
The CSLPC expects some improvement in September, driven by a seasonal pick-up in construction activity, although short-term suspension in construction works during the Mid-Autumn Festival on September 13 and National Day holiday over October 1-7 may affect both supply and demand. The message also highlighted that China’s steel export markets will remain challenged for the rest of 2019 due to rising international trade frictions.
A weaker steel market is in line with Roskill’s expectations. China’s H1 10% year-on-year increase in crude steel production was creating a glut as domestic demand was not following. Traditionally, the second part of the year is weaker than the first half, although construction usually shows some rebound in September-October. Although a weaker Renminbi could make steel exports more competitive, we believe that exports will be constrained by the current trade environment combined with a slowing global economy.
In the first part of the year, China’s domestic demand was driven primarily by infrastructure spending. The Chinese government does not want to commit, at least for the time being, to a full-scale stimulus program that would put at risk the deleveraging/de-risking measures engineered over the past two years. Infrastructure, therefore, remains the only card that the Chinese authorities will continue to play, although cautiously.
Roskill’s 2019 crude steel production forecast remains, at this stage, unchanged at 974.7Mt, a 5% year-on-year increase.