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China's steel-related manufacturing production index slips in October

Highlights

Index down 13 points from September

Property sector remains major drag on steel consumption growth

China's manufacturing production index of steel consumption produced by S&P Global Platts stood at 102 points in October, down 13 points from September and 6 points lower from the same period of 2020.

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The production 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.

In the last few weeks, construction-related manufactured goods have taken the biggest hit from the slowdown in China's property sector, while the outlook is promising for the consumption-related goods sector, which is expected to receive more policy support in 2022.

In October, slow production of engineering machinery, home appliances and vehicles contributed the most to the decline in the manufacturing production index.

The decline in China's manufacturing steel demand has outstripped the pace of decline in steel production since mid-October.

As a result, sales profit margins of domestic hot-rolled coil, or HRC, fell 64% from the start of October to $74/mt at the end of the month, data from Platts Analytics showed. Since Nov. 10, HRC margins have turned negative. HRC margins are an indicator for the price trend in the flat steel sector.

Property sector slows down

The downturn in engineering machinery and home appliances manufacturing was a result of a slowdown in China's property construction activities, some sources said.

China's property sector has been under pressure for a while now, a development triggered by measures to tighten borrowing that were taken to defuse the sector's debt risks.

The outlook is also not looking promising for the sector in the near term, with the slowdown in land purchases and home sales in 2021 expected to continue into 2022.

Home appliances sales in China always trail property sales, which include a large portion of pre-sales by property developers. This property is usually delivered to buyers around 1-2 years after the sale.

China has recently started to ease credit borrowing to property developers with a healthy outlook. Some market sources expected the sector's financing to receive more policy support in the near future.

However, a stimulus package is not seen as likely, but instead would probably be mainly aimed at stabilizing housing prices and guaranteeing new home delivery, sources said.

Promising consumption-related sector

China is expected to issue more stimulus packages to the consumption sector to cushion the slowdown in economic growth, sources said.

High-end manufacturing sectors such as new energy vehicles, intelligent home appliances as well as solar and hydro power generation are among those which are most likely to benefit from policy support in 2022.

Meanwhile, China's vehicle production is like to speed up in early 2022 as chip shortages are expected to ease from then, sources said.

Flat steel products such as HRC, cold rolled coil, plate and silicon steel are expected to gain momentum next year, steel market participants said.

In October, shipbuilding and container production provided the major upward momentum in the manufacturing sector due to strong exports. Some sources expected shipbuilding to remain strong in 2022 because of good order bookings received in 2021.