China's Steel Demand Surges in June! But Can It Overcome the Hurdles Ahead?

China witnessed a bounce-back in its monthly manufacturing steel demand in June, although it did not match up to the demand recorded in the same month of the previous year, as per the data revealed by S&P Global Commodity Insights. Despite the slump in the construction-related manufacturing segment, resilience was displayed in the majority of the sectors, which was primarily owed to robust exports and government-initiated infrastructural investments.

A positive outlook for 2023 was observed among market players, particularly anticipating that the steel demand outside the real estate-related sectors would show robust performance. Nonetheless, the ongoing surge in steel production could have a potential impact on the profitability of steel producers.

The steel consumption manufacturing production index in China, formulated by S&P Global, demonstrated a rise to 116 points in June, from the previous month's score of 104 points. However, it fell short compared to 118 points recorded in June of the previous year.

This production index utilizes data provided by China’s National Bureau of Statistics, representing 18 steel-related manufactured goods divided into seven sectors. These sectors are then weighted as per their steel consumption share. The baseline of 100 is determined by the monthly production average of 2018.

June recorded month-to-month and year-to-year increases in the manufacturing of several commodities like vehicles, ships, home appliances, power generation facilities, and railway facilities. However, machinery and containers reported a decline on a yearly basis, according to the NBS data.

Owing to its contribution of about 21% to the manufacturing steel demand, China's vehicle production has been on a steady incline since March, largely due to a boom in exports. An impressive year-on-year increase of 65.7% was witnessed in China's vehicle exports for June, with a total of 411,000 units. The total exports for the first half of 2023 reached 2.341 million units, marking a rise of 77.1% year-on-year, as per China’s customs data.

Despite the tepid domestic demand, the strong exports, primarily electric vehicle cars, led to a slight 0.8% year-on-year increase in China's vehicle output in June, with a total of 2.564 million units. 

Market insiders anticipate the upward trajectory of China's passenger car production and its associated steel demand to sustain throughout the second half of 2023, thanks to the thriving export sector. On the other hand, the home appliances sector might face a slowdown due to weak new home sales.

In the meantime, a strong steel demand from the shipbuilding sector is projected by market experts for the rest of 2023, largely due to a considerable backlog of shipbuilding orders from the past few years. Additionally, China's fiscal support for infrastructure is set to provide a boost to the power generation and transportation-related manufacturing sectors.

However, the real estate sector continues to weigh down the overall manufacturing performance. 

The production of excavators, a metric for construction-related machinery, saw a year-on-year decline of 15.3% in June. Excavator output for the first half of 2023 was down by 18% compared to the corresponding period in 2022.

A market trader based in eastern China expressed his concerns about the continued downward trend of the property sector, and its consequent negative effect on construction and manufacturing steel demand, at least for 2023.

Considering the blow to the property sector, the prospects for China's manufacturing sector to generate substantial incremental steel demand for 2023 appear bleak. Market insiders believe that unless China manages to keep its crude steel output within 2022 levels, the profit margins of flat steel products, primarily consumed by the manufacturing sectors, may not see an improvement in the second half of 2023.

The profit margin for domestic hot rolled coil sales, a key metric for the flat steel market, fluctuated significantly from the start of 2023 at negative $12.03/mt to $26.13/mt in mid-June. However, it saw a decline to $7.78/mt by July 20, as the data from S&P Global indicates.

Source: Reuters (Reporting by Carman Chew)