China's HRC prices languish despite March rebound in manufacturing activity

China's manufacturing activity recovered strongly in March as coronavirus containment measures were scaled back, but the ramp-up failed to lend any support to hot-rolled coil prices, which hit a 33-month low at Yuan 3,200/mt ($451/mt) on April 1.

The release of monthly manufacturing data in recent days has confirmed market observations that activity was far stronger in March than in February, when China imposed widespread lockdowns to contain the spread of the coronavirus.

However, while workers returned en masse to factories in the month, demand both domestically and abroad remained lackluster, with many of China's trading partners in Asia imposing their own coronavirus lockdowns in the month and a myriad of cross-border supply chain issues emerging as a result.

The latest manufacturing purchasing managers' index or PMI published by China's National Bureau of Statistics surged to 52.3 in March from 29.6 points in February, hitting the highest level since September 2017. The PMI published by Chinese media organization Caixin rose to 50.1 in March from a record low of 40.3 in February.

While the strong rebound in the PMIs from February's unprecedented lows was widely expected, analysts in China cautioned it did not mean production and operating rates had returned to pre-pandemic levels. On a year-on-year basis, the NBS' March PMI was down 3.5%.

The Asian economics division of US think tank Center for Strategic and International Studies said this week it doubted there was any "substantial bounce-back yet," in reference to the NBS' PMI.

In S&P Global Platts' latest Iron Ore & Steel Outlook Survey, no respondent said manufacturing would drive significant demand for steel in the April-June quarter.

Domestic HRC prices fell around 10% in March and are currently down 17% from the start of China's Lunar New Year holidays in late January, according to Platts data. HRC mill margins fell to minus $11.56/mt on April 1, the lowest level since last August, when margins were bruised by a spike in iron ore prices. The negative margin indicates that some HRC production could be running at a loss at present.

In the Platts outlook survey conducted last week, most participants saw HRC margins at Yuan 100-200/mt ($14-$28/mt) in Q2, but sentiment has deteriorated since then.

Platts estimates that around 60%-70% of China's manufacturing activity had resumed by mid-March, but capacity utilization rates were likely to be closer to 50%, which is one reason why flat steel prices are so low. Exports do not provide a better avenue as demand has collapsed in most Southeast Asian countries, and there was plenty of competing material adding to pressure on prices.

China's Ministry of Industry and Information Technology said vehicle industry restart rates were around 97% by end March, with 82% of workers having returned. However, some South Korean automakers with operations in China are understood to have reduced their cold-rolled coil imports by up to 70%, indicating operating rates are still low in some cases.

KEY SEGMENTS SLUMP IN JAN-FEB

March data for key manufacturing sectors has yet to be published. NBS data for January-February showed China's production of white goods and appliances slumped 35% on year in the two-month period, posting the first negative growth in three years. Sales were hindered by workers being unable to provide installation services during province-wide lockdowns, industry sources said.

China's vehicle production in February plunged almost 80% on year to 285,000 units, while sales fell 79.1% to 310,000 units, according to China Association of Automobile Manufacturers data. Hubei province, the source of the coronavirus, produced 2.2 million car units in 2019 and accounted for around 9% of China's total car production. Restrictions in the province are only now being lifted.

Some provinces in China have tried to stimulate vehicle sales with incentives, such as Nanchang in Jiangxi province offering a Yuan 1,000 bonus for each new car purchased, while Hangzhou in Zhejiang province has announced plans to purchase 20,000 small buses this year. More importantly, China said this week it would extend the subsidies and tax exemptiond on purchases of new energy vehicles that was due to expire year end for another two years in a bid to boost sales.

But all of these measures are unlikely to make a significant impact on demand for coil. Automaking accounts for just 5%-6% of total steel consumption and white goods and appliances around 2%.

Given strong steel production in China, its high inventories and muted demand, it is hard to see much upside for HRC prices in the next 1-2 months, one trader said.