China's macro indicators bearish in Jan-May'24; manufacturing cautiously optimistic

• Demand, decarb issues curb crude steel output
  
  
• Steel exports keep iron ore demand supported
  
  
• Infrastructure investment falls as realty bites
  
  

Morning Brief: China's macro indicators predominantly showed a bearish trend over January-May, 2024, as per data tracked by BigMint. Crude steel output continued to fall, albeit at a slower pace. Manufacturing investment growth showed two months of consecutive dips but recorded growth y-o-y. Infrastructure investment slipped into negative zone y-o-y while realty continued its downward march despite the booster shots. BigMint takes a look:

Crude steel dips on sustained weak demand, emission issues

China's crude steel production dipped 1.40% over the months under review to around 439 million tonnes (mnt) amid two key reasons. One is the decline in key macro parameters over January-May 2024 which indicate sustained decreased steel consumption and squeezed margins of mills. Real estate construction, which contributes around 60% of downstream demand, has continued to perform poorly. Plus, manufacturing and infra performance has become sluggish leading to rising inventory levels although May, on a standalone basis, performed better.

Secondly, China is pressing on the accelerator in its race to carbon peaking by 2030 and net zero by 2060. Plans are afoot to reduce about 53 mnt of steel industry CO2 emissions by 2025. Energy consumption and carbon emissions from four industries-steel, oil refining, synthetic ammonia, and cement--account for about 20% and 30% of the national total, respectively. In addition, 15% of crude steel production capacity has not yet reached the benchmark in terms of energy efficiency. Thus, China has issued special action plans for energy conservation and carbon reduction in these four industries.

Iron ore demand sustains: China's iron ore imports rose 7% to around 514 mnt over January-May 2024. This was because buyers had stocked up to tide over the various festivals, including the Lunar New Year, Dragon Boat Festival etc. Secondly, prices of the Fe62% fines imported by China remained stable y-o-y at $120/t CFR y-o-y, which further supported procurements. Thirdly, steel exports have remained robust, keeping iron ore demand somewhat buoyant.

Steel exports continue uptrend: Steel exports continued their upward march as volumes increased 25% to around 45 mnt over the first five months. Mills and traders have no choice but to fall back on exports to keep the cash registers jingling in the face of persistently bleak domestic demand. However, they are doing so at the cost of eroded value. Chinese benchmark HRC export offers, on average, declined 14% y-o-y to $552/t FOB over January-May 2024 against $644/t FOB seen in the same period in 2023.

Manufacturing shows cautious optimism

Manufacturing investment growth showed a y-o-y uptrend over the first five months. For instance, the growth averaged 9.32% over January-May, 2024 against 7.18% in the same period last year, although on a m-o-m basis, it slowed to 9.6% in May from 9.7% in April. May industrial output grew 5.6% y-o-y, NBS data showed, slowing from 6.7% in April.

But, from January-May 2024, automobiles production rose 6.5% to 11.38 million units (MU) while sales averaged 2.29 MU against a lower 2.12 MU in the same months last year.

Output of excavators touched 123,925 units, a y-o-y increase of 4.6% while washing machines spurted 9.4% to 44.954 MU, and refrigerators by 12% to 41.791 MU, with air conditioners at 128.807 MU, up 17%. Manufacturing of civil ships rose 16% to 15.826 M DWT. It seems demand for non-real estate steel was relatively strong in the first half, with the trend shifting from strong expected demand to strong actual demand. But, there is cautious optimism as the real economy booster, realty, is still in the doldrums.

Infra investment falls y-o-y, m-o-m

Infrastructure investment growth averaged 6.12% in January-May 2024 against 8.6% in the same period last year, and fell to 5.7% in May from 6% in April, indicating that this is a pain point China is still nursing. Over January-May, funds in place for real estate developers fell by 24.3% y-o-y, and a 0.6 percentage points dip from January to April, 2024. Slowed home demand, compressed margins and erosion in export value are discouraging investments despite the stimulus measures.

Real state

China's real estate development markers fell further in May to -10.1% after the pace of decline slowed slightly to -9.8% in April. Real estate development has been in negative territory since Covid and the collapse of realty giants a few years back and the sector is still unable to recover despite the stimulus props. Many feel the policies will take some more time to take effect.

From January to May, new commercial housing sales fell 28% y-o-y, and newly started housing areas, by 24% y-o-y.

Naturally, with realty down, cement production dropped 10% in January-May 2024 to 687 mnt.

Coal

Coal production fell a slight 3% to 1,860 mnt y-o-y on continued safety inspections and environmental curbs country while imports of the fuel picked up a significant 13% to 205 mnt due to higher power demand and generation y-o-y and lower domestic production.

Outlook

The International Monetary Fund has upgraded China's economic growth to 5% from the previous 4.6% for 2024 although it is dimmer for the years ahead.

The property crisis is having ramifications across investments and businesses which is ultimately impacting consumer demand. An aging population is adding to the bleak outlook.

But, factors like sustained stimulus shots and improvement in global steel demand may support steel demand in the second half of 2024.