MNI: China H2 Steel Demand Seen Stronger On Property Activity

Surprising weakness in Chinese steel prices, which comes amid questions about the strength of domestic demand amid a broader economic upswing, should give way to renewed vigor in the second half as construction activity picks up and the property market recovers, industry sources told MNI.

Their optimism counterbalances concern expressed by policy advisors and researchers about whether domestic demand can be sustained in the second half of the year, after a government-funded infrastructure drive provided most of the impetus for better-than-expected growth in gross domestic product of 4.5% in the first quarter of 2023. (See: MNI: China Q1 GDP Seen Up 4%, But Demand Weak Into H2-Advisors).

Even as the economy bounced back from Covid restrictions, front-month Shanghai Futures Exchange prices for steel rebar futures tumbled 13% from mid-March, to around CNY3,950 a tonne last week, just two-thirds of 2021 highs. Iron ore futures declined 12.5% to USD120 a tonne over the same period. While the sharp adjustment was driven by a government crackdown on futures market speculation, and rebar prices are still up about CNY500 from October’s 12-month low, steel demand has lagged expectations this year on weaker-than-expected Q1 demand for construction and also for manufacturing, which has been hit by falling exports.

Expectations for post-Covid steel demand has proven underwhelming, partly due to sluggish activity in the property sector, said Nancy Zheng, senior researcher at Mysteel, an industry information provider.

MANUFACTURING TRACKS EXPORT WEAKNESS

Investment by property developers fell 5.7% y/y for the first two months of 2023, key indicators show , while exports slid 6.8% over the same period. Manufacturing recorded weaker activity, with Caixin’s PMI Index falling to 50.0 in March, missing analyst expectations of 51.7. The sector accounts for roughly 30% of Chinese steel demand, which totalled almost 1 billion tonnes last year, according to Fitch Ratings

The crack down on speculation came after iron ore futures soared 64% to USD136.0 a tonne by March 15 from the Nov 2 low of USD82.5, prompting an April 7 warning from the National Development and Reform Commission, backed up by official visits to caution firms.

“Measures by the NDRC to cut down on speculation have worked to some extent and made the market more rational," said Wang Guoqing, director at Beijing-based Lange Steel, another information provider which serves clients in the industry, told MNI. A recent note from Lange pointed to lower-than-expected demand from infrastructure, which has been central to the government’s growth drive.

Better relations with Australia, a major iron ore exporter, have also eased prices, according to comments to state media by Liang Wujian, a senior analyst at Shanghai Zhuogang Chain Black Research Institute.

But real estate activity is set to pick up, leading steel demand to recover towards the end of the year, as activity in the real estate sector gathers pace, according to Mysteel’s senior researcher Vivian Yang, who said the second half should outperform the first.

Wang agreed, saying she expected an improvement from September.

“Real estate and construction will peak in Q3, this is when we may see some pick-up in demand and price increases,” she said.