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China's steel-related manufacturing slows; to weigh on steel prices, margins

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Platts Dirty Tankerwire

China's steel-related manufacturing slows; to weigh on steel prices, margins

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Manufacturing may decline in H2

Overseas demand for China goods seen slowing down

Industry margins face pressure

Production in China's steel-related manufacturing sector declined for the second consecutive month in May, after peaking in March, S&P Global Platts' calculations based on National Bureau of Statistics, or NBS, data showed.

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China's manufacturing is expected to decline further in the second half of 2021, which will weigh on Chinese steel prices and margins. This is likely to dent steel production at some stage in H2, market sources said.

The manufacturing production index of steel consumption weighted produced by Platts stood at 109 in May, down 15 points from April and 32 points from March. It was still 22 points higher than the same period of 2019, but has shown deceleration from the growth of 30 points seen for both April and March.

As China was under a nationwide lockdown for much of the first quarter of 2020, production index in 2019 is believed to provide a better comparison.

The index is based on production data of 17 steel-related manufactured goods from NBS, which are categorized into seven sectors and weighted according to their shares of steel consumption. The monthly production average in 2018 is used as the baseline of 100.

In May, production sub-indexes in sectors of machinery, automobile, shipbuilding and home appliances all saw month-on-month declines, although most of them were still higher than the same period of 2019.

Power-generation facilities and railway transport were the only two sectors that witnessed month-on-month growth in May. The power-generation sector was also 27 points higher than May 2019, but railway transport sector was 5 points lower than May 2019.

The production sub-index in container manufacturing sector was almost unchanged from April, but more than doubled from the level seen in May 2019.

Domestic consumption recovery slows

Some market sources said the slowdown in manufacturing production, especially those of machinery, automobile and home appliances, indicates domestic consumption recovery has remained slow, while overseas demand for these Chinese-manufactured goods may have peaked.

According to some sources, it is almost certain that overseas demand for some of Chinese-manufactured goods would taper off in H2, when operations in overseas factories gradually return to normal.

The recovery in domestic consumption might still be too slow by then to fully offset the slowdown in overseas demand, they said.

Over January-May, the total value of China's consumer goods' retail sales increased 8.6% from the same period of 2019, equivalent to a 4.3% annual growth, still much lower than the annual growth rate of 8% in the full year 2019, according to NBS data.

Boom period over for high margins?

Sources said due to a spate of government measures to tackle market speculation and low seasonal demand, the Chinese domestic steel prices have dropped quickly since mid-May.

Concerns remain that the environment of high steel prices and margins, witnessed in much of the first five months of 2021, might have been over, sources said.

Steel prices and margins might face a downward pressure through most of H2, due to insufficient steel demand from both manufacturing and construction sectors.

The government might no longer impose top-down orders to cut steel production, but slowing demand might lead to a decline in steel output at some stage in H2, according to some sources.

The Chinese domestic hot rolled coil prices dropped 19% from a high seen on May 12 to Yuan 5,380/mt ($832/mt) on June 21, Platts data showed. The HRC sales margin decreased by 79% over the same period to $59/mt, according to Platts Analytics.