China's crude steel production inches down by 0.34% m-o-m in Jul'23

China's crude steel production inched down by 0.34% m-o-m to 90.8 million tonnes (mnt) In July 2023. However, production rose by 11.5% against the same month in 2022, as per the data from National Bureau of Statistics (NBS). In addition, during January-July 2023, the cumulative output rose by 2.5% y-o-y to 626.51 mnt.

On a daily average basis, crude steel output stood at 2.929 mnt during July, down 3.6% y-o-y.

Factors behind drop in production

1. Production curbs: Production restrictions in Tangshan as well as shutdown of blast furnaces from 21-31 July led to reduced output. In addition, the Chinese government has instructed mills to ensure that this year's output does not exceed last year's level. Furthermore, some steel plants with electric arc furnaces (EAF) decreased production due to rising costs and limited supply of scrap, which has hit their margins.

2. China's steel fundamentals stay weak in July despite low inventory: The Purchasing Managers' Index (PMI) for China's construction sector declined in July, falling to 51.2 from 55.7 in June. This is due to a number of factors, including weak property demand and government efforts to control steel production.
However, the PMI for manufacturing sector rose slightly in July, to 49.3 from 49 in June. However, it remains in a contraction phase. This scenario has lend some support to the PMI for steel industry which remains unchanged at 49.9 in July against June.

Despite the gloomy fundamentals, inventory accumulation in China's steel market was less severe than expected in July. This is likely due to a combination of various factors, including government intervention to control production and weak demand.

For instance, steel inventory of Chinese mills has remained identical in June and July this year. The inventory was reported at 14.487 mnt by end July as against 14.780 mnt a month ago, as per CISA data. In the beginning of July it was 15.893 mnt compared with 15.804 mnt in early-June.

Outlook:
Steel output is expected to decline in the second half of 2023 as the government tightens the restraints on steel manufacturers by way of production curbs and maintain better environmental health. Also amid the off-season and slow growth momentum of infrastructure and construction industrial buyers the consumption too is expected to stay lackluster. However, market participants opine that the government intervention by ways of various policies to boost consumption at mirco levels might lend some support to the current gloomy market sentiments.