Mixed outlook for Chinese manufacturing as steel margins improve

Melbourne — Chinese manufacturing activity showed signs of improvement in August, indicating stronger support for flat steel margins that returned to positive territory at the end of the month.

The manufacturing purchasing managers' index, published by Chinese financial media company Caixin, rebounded to 50.4 points in August from 49.9 in July. It was the first time the PMI had risen above 50, which denotes the sector is growing, since May.

In its report released Monday, Caixin said manufacturing production grew at its quickest rate for five months in August, while new domestic orders remained stable. Export demand for Chinese goods continued to suffer in August and overall sentiment regarding production over the next 12 months was extremely bearish due to tensions with the US.

Producers were forced to heavily discount goods to entice sales in a subdued domestic market, while the cost of input materials, including steel, fell at the fastest rate since January, Caixin said.

This corresponds with S&P Global Platts' assessment for Chinese domestic hot-rolled coil, which averaged Yuan 3,703/mt ($517/mt) in August -- the lowest monthly average since Yuan 3,683/mt in January.

The manufacturing PMI published by China's National Bureau of Statistics dipped to 49.5 points in August from 49.7 in July. The NBS PMI looks mainly at the experience of state-owned manufacturers, while the Caixin PMI largely covers privately-owned and smaller companies.

Many Chinese mills have been selling HRC at a loss since the third week of July because of high iron ore prices and weak downstream demand, according to Platts analysis.

But HRC margins returned to positive territory August 30 for the first time in a month, reaching $4.78/mt.

Chinese steel market participants expect manufacturing to improve in the final quarter of this year on a slight recovery in the auto sector. Machinery manufacturing is expected to remain in the doldrums, however, and is unlikely to provide any upward momentum to the flat steel market.

-- Paul Bartholomew, paul.bartholomew@spglobal.com

-- Edited by Manish Parashar, manishparashar@spglobal.com