China sees healthy Oct, thanks to booster shots, but, realty still gasps. What lies ahead?

• Crude steel output up m-o-m, down in 10MCY'24
  
  
• Manufacturing, infrastructure investments up m-o-m
  
  
• Iron ore restocking continues amid falling output
  
  

Morning Brief: The booster shots injected by the Chinese government in September 2024 continued to positively impact the economy's health in October. Crude steel production, manufacturing, even infra spends, were up. But realty continued to bite.

BigMint goes behind the scene:

Crude steel output up, but long-term goal intact: The September boosters ensured an increase in crude steel production in October. Data from the National Bureau of Statistics maintained with BigMint revealed, October production was up over 6% m-o-m at 81.88 million tonnes (mnt), which was a y-o-y increase of 3%. A marginally higher increase in manufacturing and infrastructure investment supported this uptrend.

However, the cumulative January-October 2024 production volume was down 3% at 851 mnt, continuing January-September's downward trend, indicating that the long-term goal is intact, because of certain factors.

1) China is focused on meeting its carbon emission goals, which entails cleaning up steel, one of the heaviest contributors to the carbon footprint. The country has pressed on the accelerator on this front, after some post-Covid deflections, when the government was more focused on bringing the economy back on track. Recently, the country said, it aims to introduce 200 rules and regulations to calculate the carbon footprint of major industrial products, by 2027. Priority will be given to sectors like steel, non-ferrous metals, construction materials, new energy vehicles etc.

Cumulatively, China has already eliminated about 300 mnt/year of outdated steel capacity and 1 billion tonnes/year of outdated coal capacity. Although no timeframe has been set, China has indicated, paring steel and coal surplus to acceptable levels will take eight years.

2) That apart, anti-dumping investigations against China from regions/countries like the European Union, Vietnam, Turkiye and Malaysia are also impacting exports, and consequently, production.

In tandem with crude steel, pig iron production fell 4% to 715 mnt in the first 10 months.

Iron ore imports ride prices, strategic stock-ups: Imports of iron ore, however, continued go contrarian to crude steel output. Volumes over January-October, rose almost 5% to 1,023 mnt, although this threw up a flat trend compared to January-September. In fact, this contrarian trend of surging iron ore imports against declining steel production and demand has been baffling experts for quite some time. There are a few factors impelling this trend.

1) Prices of the Fe62% fines, which China typically imports in huge volumes for blending with its low-grade domestic ore, have been falling since March 2024 from their peak of $135-136/t CFR at the beginning of the calendar. Prices have not only fluctuated since then but fallen to as low as $93/t CFR in September, 2024. Chinese buyers have been taking advantage of the falling prices to stock up strategically, as they did ahead of the Golden Week and earlier in the year in the run-up to vacation periods.

2) This positioning also denotes that China has been stocking up in anticipation of possible further measures that will support domestic demand. Two sets have already been unveiled in September and November.

3) The steady ore procurement also indicates China is hedging against possible future supply constraints, once the anticipated demand turnaround happens.

Of course, there is always a possibility these stimulus measures may fall short but China seemingly prefers to stay prepared for all eventualities.

Steel exports rise as buyers restock: China's steel exports recorded a higher 23% growth to around 92 mnt in January-October, 2024 against a lower 21% seen in the first nine months. This is more than the highest volume seen in a full year since 2016's 107 mnt. In fact, the October volumes alone were up 10% to over 11 mnt.

Again, the stimulus package of September encouraged a domestic and global uptrend in prices which Chinese mills and exporters were keen to take advantage of. M-o-m, in October, average Chinese HRC offers rose 12% while domestic HRC and rebar in Tangshan were both up 11%.

Despite the raised offers, some importing geographies did some restocking, especially Southeast Asia and MENA (Middle East & North Africa), possibly on apprehensions of further hike in offers. Moreover, the average $519/t CFR was still at a four-month low.

Lastly, as per sources, two-third of China's mills were operating at a profit, which further encouraged exports.

Steel imports were down 10% to around 6 mnt, naturally as China is still majorly battling over-capacity and dull domestic steel demand.

Manufacturing, auto sales fare better: The September stimulus had a wide-ranging positive impact. Manufacturing investment growth was up at 9.3% against September's 9.2%.

Over 10MCY'24, this was up an average 9.3% against 6.6% seen in the same period last year. Automobile production was also up 2% in 10MCY'24 to 1,501 million units (MU).

Thus, the PMI rose to 50.1 in October from 49.8 in September, a five-month high. As per the World Bank and China's General Administration of Customs, manufacturing accounts for over 90% of China's total exports.

Infra investment spend up m-o-m, down y-o-y: Infra investments also rose to 4.3% m-o-m against 4.1% in September thanks to the stimulus, but averaged a lower 5.37% over 10MCY'24 against 7.55% 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 because of over-exposure to debt, leading to financial instability. Plus, the housing sector collapse has also contributed to negative sentiments in infrastructure spending. Moreover, as per indications, China is shifting its infra focus from traditional steel-intensive projects like roads and bridges to new-age areas like cutting-edge telecom networks, EVs, high-speed rails, which require low-volume but specialised steels

Realty bites despite stimulus shots: The litmus test of the September stimulus lay in the realty check! Because most of the proposals were aimed at bolstering this segment. However, real estate development growth dropped to -10.3% in October 2024 against -10.1% in September. And, deepened y-o-y to -9.84% (7.68%), making many feel the package failed expectations. Of course, it is still too early to say so since, on 17 October, government officials announced further measures for optimising inventory and controlling supply in China's struggling real estate market. Plus, a major fiscal stimulus package was unveiled close on the heels of the US Presidential elections.

Cement suffered too, since its fortunes are closely integrated with that of realty. Production dropped over 10% to 1,501 mnt, retaining the downtrend seen for months now.

Manufacturing, heat waves push up coal demand: The country's coal production rose a marginal 1.20% in 10MCY'24 to 3,890 mnt from 0.60% over 9MCY'24. Coal imports rose a healthy 14% to 435 mnt in this period. Demand for coal was up on account of various factors.

1) Increased power demand as manufacturing fared slightly better.

2) Heat wave conditions in August-September led to increased power demand.

3) Weak hydro-power output pushed up reliance on coal-fired generation.

Outlook

The current cache of measures may take time to bear fruit, especially in the property sector.

In its October 2024 SRO, worldsteel said, the ongoing downturn in the Chinese real estate sector is expected to dominate its steel demand, which may result in a 3% decline in 2024 and a further 1% in 2025.

However, many feel, further government interventions and policy supports are possible in the near future, which can bolster demand from next year onwards.