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Traders forecast bearish outlook for iron ore, steel on weak China economic data

Singapore — The steel market responded negatively to mixed economic data out of China Wednesday, with most tipping a weak end to the year.

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The People's Bank of China announced that lending had almost halved to Yuan 697 billion ($100 billion) in October, compared with Yuan 1.38 trillion in September. Year-on-year growth of M2 money supply - which is seen as a key gauge of liquidity - fell to 8% in October from 8.3% in September.

The tighter cash flow and lending was in spite of Beijing's efforts to lift business lending to the private sector and support infrastructure projects.

"Aggregate financing to the real economy is way too low. It means that the growth momentum of the economy is insufficient. This makes it hard to see how the steel market will perform strongly over the winter," a Beijing-based trader said.

More positively, industrial output grew by 5.9% on the year in October, a 0.1 percentage point increase from September, the National Bureau of Statistics data released Wednesday showed. Fixed-asset investment grew 5.7% over January-October, up 0.3 percentage points from the year to September.

December TSI swaps traded at $71.25/dmt on Tuesday 2:45 pm Singapore time, down $1.45/dmt from Monday close.

The Chinese steel market has become bearish in recent weeks on weak economic data, a slump in steel demand from the manufacturing segments, and the realization that mandated steel production cuts in winter may not be as deep as expected.

This was borne out in the latest Platts China Steel Sentiment Index, which slumped to a 28-month low in November. The headline index, which looks at expectations for new steel orders in the month ahead, dropped to 15.23 points out of 100 from 46.03 in October. The index, released Wednesday, showed that Chinese traders of flat steel products are likely to lift exports to offset weak domestic demand.

China's housing market and property construction remain strong, which is supporting rebar prices. But manufacturing demand has deteriorated in the second half of this year, putting pressure on hot-rolled coil prices. The NBS manufacturing purchasing managers' index fell to a 27-month low of 50.2 points in October.

China's vehicle output and sales in October of 2.33 million and 2.38 million units respectively, were down 10.1% and 11.7% from a year earlier, according to the China Association of Automobile Manufacturers.

Platts data shows Chinese domestic HRC prices have fallen by 13% since the start of September to Yuan 3,810/mt on Tuesday.

With steel margins narrowing since September, end-users in China were sourcing for cheaper products as blast furnaces feedstocks, sources said.

"Supply of low grade fines is sufficient at the port, and switch of product ratio is a natural choice amid falling margins," a Zhejiang-based trader said.

An end-user source said that increasing iron ore and coking coke prices in the past month could be attributed to weaker steel margins. "Scrap has started to fall, and iron ore should follow," the source added.

The spot price of square billet in Tangshan was Yuan 3,690/mt ex-stock Tangshan Tuesday, down Yuan 420/mt from the peak seen on September 10.

-- Lu Han, lu.han@spglobal.com

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

-- Edited by E Shailaja Nair, newsdesk@spglobal.com