China economy shows flicker of positivity in end-2024. What lies ahead?

• Crude steel production decline rate slows
  
  
• Manufacturing, auto production look up
  
  
• Infra trend mixed, realty sustains decline
  
  

Morning Brief: China's macro indicators showed a slight improvement for the full year as the rate of decline showed a marginal easing by year-end in many categories as compared to the January-November, 2024 period (11MCY'24), as per data from the National Bureau of Statistics (NBS) maintained with BigMint.

For instance, the rate of decline in crude steel, cement and auto production eased, while that of steel exports, iron ore imports, and infrastructure investments improved. However, manufacturing investments remained stable while the realty downslide continued from every aspect- y-o-y in 2024 as well as in 11MCY'24. BigMint goes behind the scene:

Crude steel production falls amid maintenance schedules: China's crude steel production fell by -1.70% to 1,005 million tonnes (mnt) for the full year 2024 against a deeper -2.70% decline seen over January-November, 2024. The key reason for the declining trend was the sustained lack of demand from the real estate sector. The steady drop in production can be attributed to maintenance stoppages by mills to balance out the waning demand as Chinese mills nurse overcapacity. Several mills in central China's Wuhan and Shaanxi in the north-west had blown off their blast furnaces to start annual maintenance in end-December, and these will not be brought on-stream until next month, it was heard. The second reason was the urgent need for mills to dovetail their emissions with China's carbon peaking and net zero targets of 2030 and 2060 respectively. Lastly, several protectionist measures in steel importing are ringing a warning bell that China may not be able to dump steel so aggressively in the not-too-distant future. Lastly, improved exports volumes also required more crude steel.

In tandem with crude steel, China's pig iron output fell, but at a slower -2.30% to 852 mnt against the -3.50% seen over 11MCY'24.

Iron ore imports up as mills restock at favourable prices: China's iron ore imports accelerated by 4.90% in CY'24 to 1,237 mnt against the 4.30% seen in 11MCY'24. The higher imports were propelled by 1) the exports push from mills. 2) Mills also wanted to stock up ahead of winter and the Lunar New Year holidays that start from 29 January, 2025. 3) The restocking this year was encouraged by stable ore prices. For instance, Fe62% fines imported by China averaged $110/t CFR China against $120/t CFR in 2023.

Steel exports play catch-up with 2015's peak: China's steel exports, watched keenly across steel importing geographies, rose nearly 23% to almost 111 mnt, marginally up from 11MCY'24. But, more importantly, the country ended the year with a figure that is playing almost catch-up with the highest-ever volume of 115 mnt seen in 2015. A weakened economy in the post-Covid era, along with the real estate sector's collapse have dealt a heavy blow to mills for whom exports have been a potent conduit for offloading material as they struggle with huge capacity overhang.

However, thanks to the continued slack domestic demand, steel imports declined by nearly 11% to 6.82 mnt in CY'24, slightly lower from the -11.30% seen in 11MCY'24.

Manufacturing investment growth rises, auto speeds up: On a full year basis, manufacturing growth averaged 9.29% as against a far lower 6.58% seen in 2023. On a m-o-m basis, however, manufacturing investment growth remained almost range-bound at 9.2% in December 2024 against 9.3% in November. In the first three quarters of 2024, manufacturing GDP reached RMB 32.09 trillion ($4.49 trillion), up 10.6% compared to the same period in 2023 and accounting for around 39% of the total GDP, as per the China Briefing publication. Although the share of manufacturing within the economy has steadily shrunk over the past few decades, it remains the single largest contributing sector to economic growth, consistently accounting for over a quarter of China's total GDP.

Corroborating the manufacturing investment growth story was the 3.70% y-o-y acceleration in automobile production in CY'24, at over 31 million units.

Throughout the year, the Chinese government implemented various initiatives to foster innovation and development in key industries.

Infra investments falls as cautious govt caps spending: Infrastructure investment growth showed a y-o-y decline to an average rate of 5.19% in 2024 against 7.3% in 2023 but on m-o-m basis, the figure upped slightly to 4.4% in December 2024 against 4.2% in November.

The Chinese government has become careful in terms of public expenditure, looking at debt as a red flag. This is because over-exposure to debt led to financial instability. Plus, the housing sector collapse also contributed to negative sentiments in infrastructure spending.

Moreover, as per indications, China is shifting infra focus from traditional steel-guzzling projects like roads and bridges to new-age areas like cutting-edge telecom networks, electric vehicles, high-speed rails, etc which require low-volume but specialised steels. These are innovation-related but intrinsically linked to China's economic growth.

Realty continues to bite: The slide in real estate sector investments continued. Y-o-y, the decline in property investment was -9.95% on average against -7.98% in 2023. M-o-m, the decline slipped to -10.6% in December from -10.4% in November. Property construction's share in the steel consumption pie had shrunk from 42% in 2010 to 24% in 2023, whereas part of this demand is shifting to manufacturing and also infrastructure. The property sector imploded with the fall of Evergrande, along with other realty giants, in 2021 and has not been able to pick itself up ever since.

Because of the realty sector's mess, cement, whose fate is intrinsically linked to that of property construction, has been faring poorly for the past many years too. In 2024, the decline in cement production was at -9.50% to 1,825 mnt, although the trend was up 0.60% compared to 11MCY'24 thanks to some government stimulus.

Coal production: China's coal production upped 1.30% to 4,760 mnt over 2024 and coal imports by 14% to 543 mnt. The reasons were driven by lower hydropower generation, increased electricity demand and competitive seaborne coal prices.

Outlook

China may arm itself with further stimulus measures to strengthen its economy with an eye on policy directions from the US under President Trump who assumes office from 20 January, 2025. While exports will continue, protectionism will pose challenges. But China is also gearing up to work around these hurdles and is possibly resuming its focus on high-quality steel. Recently, its Ministry of Industry and Information Technology (MIIT) announced an ambitious plan to drive high-quality development in key industries, including steel, by enhancing standardization, with a special emphasis on marine engineering, special equipment, bearings, and steel structures.

As a result, the slight uptick in growth momentum seen at the tail-end of 2024 may carry forward into 2025.