China Macro and Metals: Steel exporters target China amid warmer economic signals

In a new monthly post, S&P Global Platts analyzes China’s key economic indicators, and what they mean for the metals sector.

Chinese commodity prices softened over September and into the first half of October, while economic data was mixed over the same period.

But compared to other global markets, China is doing pretty well. This was evidenced by countries including South Korea, Russia and India all targeting China with steel due to a lack of buyers elsewhere. Chinese domestic prices are relatively high and are curbing the country’s ability to compete in export markets. The outlook for the rest of the fourth quarter is fairly bearish as cold weather slows construction activity.

Manufacturing sentiment improves: Chart of the month

China’s Producer Price Index, which reflects factory gate prices, fell to its lowest level for more than three years in September, as weak demand pulled down commodity prices and hurt industrial profits. Export orders and investor confidence continue to be undermined by tensions with the US. China’s manufacturing sector is showing signs of improvement with Caixin’s purchasing managers’ index hitting a 19-month high of 51.4 points in September. Chinese manufacturers said input costs jumped in September but they are likely to ease this month as steel prices have fallen.

Notwithstanding China’s historic GDP low of just 6% for Q3, S&P Global Platts does not expect the stimulus cavalry to ride to the rescue. Beijing does not want to flood the economy with liquidity, create more unproductive white elephant projects, and pile more onto China’s already considerable pile of debt. Economic stability is key and the government will do just enough to support the economy and nurse it through to the end of the year. When it comes to commodities and energy demand, the future is likely to be a case of lower for longer.

Construction buoys steel consumption

• China's crude steel apparent consumption over the first nine months of 2019 increased by a very healthy 8.9% on year to 690 million mt, Platts estimates. The growth rate was in line with new property construction starts, which grew at 8.6% on year, indicating the sector remained the biggest consumer of surplus steel output.
• Hot-rolled coil margins (finished steel prices minus iron ore, coking coal and other costs) recovered in September but have deteriorated again in October. Many steel producers are producing at or below cost, which prevents iron ore from rising further.

Financing keeps steady

• Real GDP growth fell to 6% in Q3, the lowest level since quarterly records began.
• Aggregate financing, a measure of funding available to the real economy, has been rising in recent months since the low seen in April. Total funding in September was up 10.8%, the same as last month, but down from 11% in July.
• Historically, a rise in aggregate financing is reflected in a rise in GDP in nominal terms in subsequent quarters. It appears that finance has been flowing into infrastructure, as year-to-date infrastructure fixed asset investment rose 4.5% in September, up from 4.2% in August.

House prices stall but motors recover

• Over January-September floor space under construction went up 8.7% on year to nearly 8.34 billion sq m, while housing starts rose 8.6% to 1.65 billion sq m. Both measures slowed slightly in September.
• During the same period, China’s property developers obtained 154.54 million sq m of new land leases, down 20.2% on year.
• The number of cities where house prices are rising slowed in September to just 53 of the 70 cities monitored by the National Bureau of Statistics. Slower property market growth could dent demand for consumer products.
• China's vehicle output and sales recovered in September to 2.21 million and 2.27 million units respectively, up 11% and 16% on the month, but down 6.2% and 5.2% on a year earlier. The near-term outlook for the sector remains bearish.

Iron ore imports high and stable

• Hot-rolled coil, the key steel product used in domestic manufacturing, averaged Yuan 3,667/mt ($517/mt) in September, before falling to an average of Yuan 3,545/mt over October 8-22, according to Platts data.
• China produced 82.77 million mt of crude steel in September, up 2.2% on year, but a big drop from 9.3% on-year growth in August as pre-National Day holiday steel production cuts took effect.
• China approved eight steel capacity replacement projects over September to mid-October that will see 13.56 million mt/year of crude steel capacity commissioned in the next 3-4 years, Platts analysis shows.
• China’s iron ore imports have stayed above the 90 million mt mark for three consecutive months, putting upward pressure on seaborne spot prices. China imported 99.36 million mt in September, up from 94.9 million mt in August and 93.47 million mt a year earlier.