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China's manufacturing production index drops for third straight month in June

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Platts Market Data Metals

China's manufacturing production index drops for third straight month in June

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Points to domestic consumption slowing

Property, infrastructure to remain soft in H2

China's steel-related manufacturing production index produced by S&P Global Platts declined for the third consecutive month in June, indicating domestic consumption has continued to slow down.

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The manufacturing weighted production index for steel consumption stood at 106 points in June, down 2 points from May. It edged up 0.9 points on a year-on-year basis, which trailed 12-point year-on-year growth in May.

The index is based on 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.

Production sub-indexes for the machinery, automobile and home appliance sectors all posted month-on-month declines in June for the third consecutive month to 105, 85 and 125 points, respectively. While the machinery sector was 4 points higher on the year, the automobile and home appliances were down 17 and 14 points, respectively, from June 2020.

Shipbuilding, containers, power-generation and railway transport posted month-on-month gains in June, but only the shipbuilding and containers sectors rose on a year-on-year basis, by 16 and 160 points, respectively.

The strong year-on-year rise in container manufacturing indicates global trading for manufactured goods remains robust, a source said. However, overseas demand for Chinese goods was forecast to slow down in the second half of 2021 as COVID-19 restrictions ease and operations at overseas factories and ports ramp up, the source added.

H2 demand seen subdued

Steel demand from China's manufacturing sector was unlikely to see any notable improvement in H2 because the recovery in domestic consumption may not be strong enough to offset the forecast slowdown in export demand, some market sources said.

The total value of China's consumer goods retail sales was 10% higher in June than in the same pre-pandemic period of 2019, equivalent to 4.9% annual growth, still well below the annual growth rate of 8% averaged over 2019, according to latest NBS data.

China's property and infrastructure construction sectors were expected to remain soft in H2 due to the country's deleveraging campaign that calls for tightened measures around those two sectors, sources said. The move was also expected to undermine production of steel-related manufactured goods, such as excavators and loaders.

Even as China's overall steel demand was seen slowing down in H2, it was still difficult to predict price direction for Chinese steel, as it remains to be seen whether China's steel output cuts will be strictly implemented and outstrip the decline in demand, according to sources.

China is aiming to keep 2021 crude steel output below 2020 levels, and has already widened its output cut orders across the country.

To ensure this year's annual output remains in check, China's crude steel production will have to decline by 59 million mt or 11% year on year to 502 million mt over July-December, according to Platts calculations based on NBS data.