China's Aug'21 PMI dips as steel production slows down

China's Purchasing Managers' Index (PMI) in Aug'21 was at 41.8%, down 1.3 percentage points compared to Jul'21. This indicates that the downward pressure on China's steel industry has increased. The sub-indices show that with Aug'21's production cuts in force, steel production has slowed down, iron ore purchases have reduced, and prices have fallen. The epidemic and extreme seasonal factors have led to a decline in demand, and steel prices have also fallen accordingly.

It is estimated that in Sept'21, steel demand may enter its peak season, but production will continue to be tight because of the production curbs continuing, the Lange Steel Information Research Centre informs SteelMint. Steel prices are expected to rise moderately, and raw material costs may rise as per Lange Steel.

August focus was on production

The focus of the steel market in Aug'21 was on the production side. Due to the implementation of production curbs in many regions, steel procurement declined. The production index in Aug'21 was 44%, which has been below 45% for two consecutive months, indicating that production continued to decline. According to statistics from the China Iron and Steel Association (CISA), in mid-Aug'21, the key iron and steel companies produced a total of 2.22 million tonnes (mn t) of crude steel per day, a decrease of 0.82% m-o-m and a y-o-y decrease of 7.62%. Daily production of iron was 19 mn t, a m-o-m decrease of 0.35% and y-o-y decrease of 7.21%. Nissan produced 2.02 mn t of steel, down 2.32% m-o-m and 8.61% y-o-y. All products have declined from the previous month.

Raw material procurement down

Raw material procurement of steel mills slowed down accordingly, and the procurement volume index fell 1.3 percentage points from the previous month to 39.7%.

The decline in production has driven iron ore prices down, leading to an easing of the cost pressure on steel companies. In Aug'21, steel production cuts also reduced iron ore consumption, and under the continuous effect of the policy, the expected decline in iron ore has been strengthened, causing iron ore prices to plummet continuously since Jul'21, which have fallen below $140/t by end-Aug'21.

Unlike iron ore, coke prices have been raised thrice in Aug'21 - when environmental restrictions on production have led to tight coal supply. The current tight supply situation lacks effective measures in the short term, says Lange Steel. But, on the whole, the cost pressure of steel enterprises has eased this month.

The purchase price index was 47.7% in Aug'21, a decrease of 8.6 percentage points from the previous month, and it fell below 50% for the first time in the past 10 months.

Domestic steel demand down

In August, domestic steel demand continued to be weak because of the floods and pandemic. The new orders index was 31.6%, down 5.2 percentage points from the previous month, and stayed below 40% for four consecutive months.

According to the survey, the current overall domestic demand performance is not good. East China, South China and other places have been impacted by high summer temperatures and rains and the pandemic, leading to low demand.

The Shanghai Stock Market indices show that the average daily purchase volumes in Aug'21 dropped by 4% m-o-m, and that transactions dropped slightly.

From the perspective of the main steel mills, demand for infrastructure steel is not very optimistic. Due to the slow issuance of special bonds by local governments, coupled with the impact of the epidemic on human resource, materials supply, construction players are short of funds and construction is slow.

Demand for real estate steel has also fallen. From Jan-Jul'21, the area of new housing starts fell by 1%.

In terms of steel exports, after the cancellation of export tax rebates for 23 steel products on 1 Aug'21, export volumes continued to tighten rapidly. The new exports order index was at 31.8%, lower than 35% for two consecutive months, indicating that the policy has restricted steel exports.

Prices impacted

The decline in demand has led to a rollback in steel prices, and profits may decline m-o-m. Although steel production declined in Aug'21, the decline in demand was even more pronounced, which significantly weakened sales prices.

On 2 Aug'21, the Shanghai rebar price index was at RMB 5,179 /t ($802/t), hitting the peak of the month, and then fluctuated all the way down. It also hit the lowest point of the month at RMB 4,914/t ($761/t) on 19 Aug'21. In the second half of August, when the epidemic was under control and the weather eased, demand rebounded slightly, and steel prices also rose slightly to RMB 4,967/t ($769/t) on 26 Aug'21.

In comparison, profits of the steel industry fell in Jul'21 after reaching the highest point of the year in Jun'21. Because the price in Aug'21 fell on the basis of Jul'21, coupled with the decline in transaction volumes, the profits of the steel mills in August may be slightly lower than the previous month's.