China boosters bring temporary relief in Jan-Sep'24. More measures needed for full recovery

• 9MCY'24 crude steel output dip overtakes Jan-Apr's 3%
  
  
• Iron ore imports increase amid pre-holiday restocking
  
  
• Steel demand downtrend seen continuing into 2025
  
  

Morning Brief: The recent slew of booster shots gave a positive twist to the Chinese tale in September, 2024 but which failed to sustain into October. Crude steel output and infra investments continued to decline while manufacturing, riding auto sales, looked a tad better. Overall, 9MCY'24 seemed a mixed bag.

BigMint goes behind the scene:

Crude steel output drop deepens: China's crude steel production fell 3.6% over January-September, 2024 to 768 million tonnes (mnt) against 691 mnt seen in January-August this year, as per data NBS maintained with BigMint. This drop was the deepest so far compared to the rest of the year, even sharper than the 3% seen in January-April 2024. The production drop can be attributed to a few reasons:

1) The boldest till date stimulus package, announced about a month back, had mixed responses with many saying these were not enough to revive the economy. China's steel industry's revenues dipped nearly 5% in January-August 2024, squeezing margins further. The operating cost during this period also dropped 4%. Despite the decrease in costs, the industry incurred a loss of RMB 16.97 billion ($2 billion), indicating the continued uphill struggle in key consuming sectors like real estate, infrastructure etc. Plus, inventories rose in mid-September. Such a scenario necessitated production cuts.

2) China is focused on meeting its carbon emission goals, which entail cleaning up its steel sector, one of the heaviest contributors to the carbon footprint. The government recently announced that, cumulatively, China has eliminated about 300 mnt/year (y) of outdated steel capacity and 1 billion tonnes (bnt)/y of outdated coal production capacity. Although the government did not set a timeframe, it indicated, paring steel and coal surplus to acceptable levels will take eight years.

3) Anti-dumping investigations against China from regions/countries like the European Union, Vietnam, Turkiye and Malaysia are also impacting exports and in tandem production.

Sagging crude steel also impacted pig iron production, which declined 4.60% to 644 mnt in the first nine months.

Iron ore imports get a leg-up from stimulus package: Imports of iron ore, however, continued go contrarian to crude steel output. Volumes over January-September, rose almost 5% to 919 mnt, although this recorded a declining trend of 0.60% compared to January-August's 5.20% growth. Two factors kept iron ore volumes boosted in this period. One was the restocking ahead of the Golden Week holidays starting 1 October. This led to depletion of port-side stocks too. Secondly, the stimulus measures caused a positive knee-jerk reaction in prices, triggering buyers to take booking positions because of better downstream demand and fears of further hikes.

Steel exports sustain uptrend but stronger yuan a bother: China's steel exports recorded a slower m-o-m growth of 21% to around 81 mnt in January-September, 2024 against nearly 22% seen in the first eight months.

However, the pace is steadily slowing from the 30% seen over January-February. Varied reasons are keeping the momentum in positive territory. One is the continuing slack home demand, especially from the property and infra construction segments. Secondly, the spate of anti-dumping investigations and growing protectionism are unnerving Chinese mills which have been dumping steel at predatory pricing across the globe.

On the other hand, the aggressively low pricing is allowing them to play in volumes to offset losses being incurred at home while the yuan devaluation of 2% from January till July also benefitted exporters. However, the currency has strengthened around 3% to the dollar to 7.056 in October so far from 7.26 in July, which might be a spot of bother from the exports perspective.

With domestic demand subdued, steel imports dropped 9% in these nine months to a little over 5 mnt.

Manufacturing, auto sales up m-o-m, y-o-y: September manufacturing saw a marginal growth of 9.2% against August's 9.1%. China's industrial production grew 5.4% y-o-y in September 2024, above forecasts of 4.6% and accelerating from August's five-month low of 4.5%. It was also the fastest and first expansion in industrial output since May, amid the government's efforts to spur growth.

Y-o-y, over January-September, 2024, manufacturing was also on a comparatively stronger wicket with a 9.3% growth against 6.6% seen in the corresponding period last year. This is because, in 2024, China's industrial production grew significantly, with industrial value-added increasing 6.3% in the first quarter. Manufacturing investment rose 10% y-o-y in the first five months. The PMI rebounded to 50.8% in March 2024, signalling a return to expansion after five months below 50%.

Automobile sales rose a healthy 15% m-o-m in September and 3% y-o-y in 9MCY'24, also helping manufacturing to accelerate. Auto production upped 2% m-o-m.

But challenges remain in terms of the housing crisis, limited home demand and near-shoring.

Debt burden curtails infra spend: Infra investments down-trended 7% m-o-m and a significant 25% y-o-y in 9MCY'24. As per an expert, China is likely to fall roughly RMB 6.5 trillion short of the investment necessary to reach its 5% GDP growth target for 2024.

Government spending has been reined in as 12 regions with high debt have been instructed to slow or suspend infrastructure projects to reduce their debt burdens.

Plus, extreme weather has also been impeding infra projects completion.

Realty gets slight relief: The last stimulus package had a knee-jerk positive impact on the beleaguered real estate sector. The pace of decline slowed to a negligible -10.1% in September from -10.2% in August. But, y-o-y, the pace of decline accelerated to 9.8% in 9MCY'24 against 7.5% in 9MCY'23. The volume of new constructions dropped over 22% y-o-y in 9MCY'24. After years of rapid expansion, the government had decided to limit credit over-exposure and speculation that led to defaults, resulting in the collapse of some of the mighty realty giants and which took a heavy toll on the economy. The latest set of stimuli include interest rate cuts and reduction in banks cash reserve ratios.

Thanks to the prolonged realty downturn, cement production eroded by 11% in 9MCY'24 to 1,327 mnt but the recent measures arrested the falling momentum compared to 8MCY'24.

Coal production rises amid increased power demand: The country's coal production rose a slower 0.60% in 9MCY'24 to 3,480 mnt from 0.90% over January-August, 2024. Coal imports rose a healthy 12% to 390 mnt in this period. One reason was the increase in coal-fired power generation while hydro slumped, triggering higher fossil fuel usage. Secondly, September coal output across categories rose 4.4% y-o-y, spurred by the booster shots which gave a slight fillip to steel and coke production m-o-m.

Outlook

After the initial euphoria, steel and key raw material prices started fluctuating and eventually dropping, leading to market uncertainty. Many feel, further measures are required for a full economic recovery that would entail robust fiscal support. Global uncertainties, exacerbated by escalating geo-political unrests, are only adding to the worries.

As per worldsteel's Short-Range Outlook, October 2024, "The ongoing downturn in the Chinese real estate sector is expected to dominate steel demand in China, resulting in a 3% decline in 2024 and a further 1% in 2025."