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PLATTS ANALYSIS: Chinese growth, steel output may slow in 2014

Highlights

Chinese crude steel production surprised on the upside again in 2013 but this year has started slowly, raising the possibility that 2014 could see China's economic growth and steel sector start to plateau. The country's crude steel output rose 7.5% year on year to 779 million mt in 2013, according to China's National Bureau of Statistics.

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Meanwhile, Beijing achieved GDP growth of 7.7% last year, beating its 2013 target of 7.5%. This was great news for suppliers of steelmaking raw materials as Chinese mills and traders consumed imports of iron ore and metallurgical coal in ever greater volumes.

But 2014 has got off to a slow start with both the HSBC and NBS manufacturing purchasing managers' indices, or PMI, falling in January. HSBC's PMI, which canvasses the views of smaller and privately owned manufacturers, fell to 49.5 in January from 50.5 in December.

The official NBS PMI, which takes the pulse of larger, state-owned manufacturers, slipped slightly to 50.5 in January from 51 in December on weaker local and international orders. In January 2013, the HSBC PMI was 52.3, the highest reading over the past two years. At that stage, there was plenty of market optimism around what China's incoming leadership might do to stimulate the economy. A year later that sentiment has largely dissipated.


Softer demand did not prevent China's crude steel production from edging upwards over January 11-20 to an average of 2.007 million mt/day from January 1-10's 1.997 million mt/day, according to a survey of the China Iron & Steel Association's member mills.

On an annualized basis, this would only amount to 732.5 million mt, well below last year's 779 million mt and a long way from CISA's prediction of around 805 million mt FOR? this year. Even if this target were achieved, it would only amount to a 3.4% increase from 2013, half the growth rate of last year.

Crude steel output is usually slower at the start of the year due to winter weather in northern China hampering construction work and the Chinese Lunar New Year holidays slowing down activity.

Participants surveyed in Platts' latest China Steel Sentiment Index for January generally expected steel production to remain flat into February, giving a score of 40 compared with 43.33 in December's index. A reading above 50 denotes an expected increase while a score below 50 indicates an expected decrease. More positively, there was a big jump in expectations for new orders with the January index giving a score of 56.86 compared with 28.49 in the previous survey.

Despite slower steel production, iron ore prices are typically at their strongest in the January-March quarter. Mills and traders top-up their stocks ahead of winter and in anticipation of weather curbing exports from Australia and Brazil. In January this year, the Platts 62%-Fe fines index fell 8.5% from $134.50/dry mt CFR on January 2 to $123/mt CFR on the final trading day of the month on January 30.

A combination of weak sentiment and steel prices, climbing iron ore port inventory and credit restrictions at many traders and smaller mills in China, has resulted in subdued trading activity since the market returned from the Lunar New Year holidays.

CHINA SECTOR OUTLOOK

China's urban fixed-asset investment in 2013 was fairly flat year on year at Yuan 43.65 trillion (about $7.19 trillion) but the proportion from the private sector increased. Chinese Premier Li Keqiang has commented that the days of major direct government stimulus spending are coming to an end, with the private sector increasingly expected to take on more of the burden.

Some Yuan 8.6 trillion of the FDI figure flowed into China's property market and represented a hefty 19.8% increase from the previous year. As property remains unaffordable for many Chinese, some analysts are tipping Beijing to introduce measures to cool the market, such as property taxes, but these are not expected to occur in the short-term.

Chinese shipyards are seeing orders recover slowly but the need to remain competitive, along with rising labor costs, mean they are struggling to stay profitable. The country received 69.84 million dwt of new shipbuilding orders in 2013, up 242% year on year, but the big jump was due largely to a very weak 2012.

The outlook for China's auto manufacturers is reasonably positive with the market expected to grow 10% in 2014 to 23.8 million cars and light trucks, but this would be down on a 13% rise last year.

Platts' sister company Standard & Poor's has predicted 'baseline' GDP of 7.4% for 2014 and 7.2% in 2015.

--Paul Bartholomew, paul.bartholomew@platts.com
--Edited by Geetha Narayanasamy, geetha.narayanasamy@platts.com