China's macro indicators continue to show bearish trend in H1CY'24; short term uncertain

• Crude steel output dips, iron ore demand modest
  
  
• Manufacturing investment performs somewhat better than other sectors
  
  
• Infrastructure investments still weak, needs policy prop
  
  
• Coal production drops amid safety, decarb issues
  
  

Morning Brief: China's macro indicators continued to show a bearish trend with five of the nine parameters in decline over January-June, 2024, as per data tracked by BigMint. Crude steel output continued to fall. Manufacturing investment growth remained stable m-o-m till June but infrastructure investment growth showed a y-o-y fall. Realty development degrowth continued to deepen despite the booster shots. China's National Bureau of Statistics recently said the country's second quarter (April-June) GDP rose 4.7% but this was slower than the 5.3% y-o-y increase in Q1.

BigMint takes a look:

Crude steel output falls amid squeezed margins: The country's crude steel production fell 1.10% over the first half (January-June, 2024-H1CY'24) to around 531 million tonnes (mnt) although the drop was slower compared to the 1.40% seen over January-May, 2024. The reasons are two-fold. One was the continued decline in the real estate sector. Dull domestic demand has been squeezing margins, diminishing enthusiasm for sustained production. Data available shows the industry's revenues fell 3.3% y-o-y in H1 while operating cost decreased 2.9%. Despite the decrease in costs, the industry incurred a loss of RMB 12.72 billion ($1.75 billion). Many mills blew off their furnaces to start maintenance works.

Two, China is gearing up to meet its decarb goals.

A total of 22 out of 34 provincial regions in China have also outlined their respective measures to curb air pollution from key sectors, including iron and steel, post-the State Council issuing an action plan aimed at improving air quality and promoting the country's 'green' transition at the end of last year. China has identified four industries-steel, oil refining, synthetic ammonia and cement as important for the national economy which cumulatively account for 20% and 30% of the country's total energy consumption and emissions. Moreover, 15% of crude steel capacity has not yet reached the benchmark level in terms of energy efficiency. Thus, the National Development and Reforms Commission, in conjunction with the relevant departments have adopted action plans on a war footing.

Restocking needs keep iron ore imports up: China's appetite for imported iron ore sustained in H1 although, again, the increase was slower at a nominal 6% compared to 7% in January-May, 2024. Buyers had stocked up in H1, typically ahead of festivals. Secondly, prices of the Fe62% fines imported by China remained stable y-o-y at $118/t CFR y-o-y, which further supported procurements. Thirdly, steel exports have remained robust, keeping iron ore demand somewhat buoyant. But, the bulk of the steel demand, from domestic end-users, was down, which kept iron ore imports overall at modest volumes.

Steel exports rise amid slack domestic demand: Steel exports, a key component of the Chinese steel industry, showed a 24% y-o-y increase in this period to around 53 mnt against 43 mnt seen in the same period in 2023. June volumes, however, were down 9% m-o-m.

After slowing down over January-May, the exports growth momentum again picked up slightly over January-June. Volumes still remained significant because, real estate, which consumes lion's share of steel demand, still has not recovered. With domestic demand down, naturally, steel imports were a no-show, falling 3.30% to 3.62 mnt.

Manufacturing investment growth robust: China's steel demand is shifting from construction to machinery and infrastructure. And there is a reason for this. China is increasing its indirect exports, within which over 50% of exported merchandise comprise machinery, components and other items related to steel. Thus, machinery's demand has increased from 20% in 2010 to 30% in 2023, as per a report. Data maintained with BigMint reveals that manufacturing investment growth grew an average 9.35% in H1CY'24 against a far lower 7% in H1CY'23.

Tracking manufacturing demand, which is currently performing better compared to other sectors, China's automobile production rose nearly 5% to around 14 million units (MU) although the pace slightly decelerated from January-May's 6.50%. Export sales of EVs, in particular, are accelerating.

Infra investment falls y-o-y, m-o-m: Infrastructure investment growth fell 6% in H1CY'24 against 8.36% in the same period last year. On m-o-m basis, in June it fell to 5.4% against 5.7% in May. Being closely linked with construction and infrastructure, cement production fell 10% in H1CY'24.

China has boosted infrastructure investment and ploughed funds into high-tech manufacturing. But, possibly more stimulus measures are required to give a leg-up to infra-building.

Real state still struggles: The real estate sector is still struggling with investments falling another 10.1% in June and growth averaging -9.6% in H1CY'24 against -6.85% in the same period last year, indicating that the scenario has worsened y-o-y. As per a report, demand from construction (urban and rural house-building, office and industrial buildings, etc), fell from 42% in 2010 to 24% in 2023. For the first half of the year, average per capita disposable income for city residents showed a nominal growth of 4.6% y-o-y, indicating no sharp increase in purchasing power. There has been a drop in the growth rate of money supply, underscoring weak credit demand in H1.

Coal production drops amid emission curbs, safety issues: China's domestic coal production has seen a decline by 1.70% to 2,270 mnt in H1CY'24 as a result of which imports of the same rose 12.50% to 250 mnt. Production fell due to safety issues at mines which led to stringent inspections etc. Secondly, because of the curbs on carbon emissions, coal production is also being capped.

Outlook

There are signs of potential improvement in demand for finished steel, but overall production is likely to decline in H2CY'24 y-o-y because of the prolonged impact on margins. The industry is waiting for a more sustained rise in demand before it decides to ramp up production significantly. Plus, energy transition paradigms will also keep production under the scanner. Further stimulus measures are expected to shore up demand, including rate cuts and bank's reserve requirement ratios.

But China's struggle to maintain economic equilibrium means more churn and volatility in global markets. Thus, the short term looks uncertain.