China's manufacturing production index of steel consumption produced by S&P Global Platts stood at 91 points in July, a five-month low but still 3 points higher than the same period in 2020.

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The production index in July also declined for four straight months, and was down 15 points from June.

The index is based on China's National Bureau of Statistics production data for 17 steel-related manufactured goods, which are categorized into seven sectors and weighted according to their share of steel consumption. The monthly production average in 2018 is used as the baseline of 100.

Manufacturing output in July was relatively higher than the same period in 2020, while steel supply fell below 2020 summer levels. China's flat steel profit margins remained strong in July.

The domestic hot-rolled coil, or HRC, sales profit margin -- an indicator for the flat steel sector -- averaged $79/mt in July, up from $50/mt during the same period in 2020, S&P Global Platts Analytics showed.

The output of medium-wide HRC in July declined 2.1% on the year to 14.55 million mt, according to latest data from the NBS.

Lower steel output was driven mostly by China's increasing efforts to cut steel output amid seasonal power shortages.

China has been aiming to lower steel production in 2021 from 2020 levels. The government in July asked steel mills to start curbing output, a measure that market sources said was aimed at controlling rising iron ore prices.

Strong steel margins

Although the average HRC margin rose to $85/mt over Aug. 1-20, some market sources were skeptical about whether margins could stay strong for the rest of 2021.

The concerns over sustainable margins emerge from the fact that manufacturing output has been declining since the second quarter of 2021.

Uncertainty remained over whether the steel output would decline further in September and beyond, as most steel mills in China still do not have clarity on the schedule of output cuts, market sources said.

Sub-indexes

In July, production sub-indexes in sectors of machinery, containers and power-generation facilities still saw year-on-year growth, while the sectors of vehicles, shipbuilding, home appliances and railway transport all declined from the previous year.

Some steel market sources said the manufacturing output of machinery and containers was likely to be weak in the rest of 2021, as overseas demand had started to taper off after operations at factories and ports there have almost returned to normal.

The production of vehicles and home appliances is expected to rebound in September, but unlikely to reach the same levels seen in the previous year because of the slow recovery in China's consumer spending, market sources said.

The value of China's consumer goods retail sales in July increased 7.2% from the same period in 2019, equivalent to a 3.6% annual growth, decelerating from a 4.9% annual growth in June, and far below the 8% annual growth in the full year 2019, according to NBS.