China's macro indicators continue to downtrend in Jan-Jul'24; manufacturing, infra investments dip y-o-y

• Crude steel output falls y-o-y, m-o-m as curbs tighten
  
  
• Infra investment dips as govt tries to reduce debt burden
  
  
• H2 may see more fiscal measures but challenges remain
  
  

Morning Brief: China's macro indicators continued to downtrend. The first seven months of 2024 (January-July, 2024) showed, five of the nine parameters remained in the red, in an extension of the trend seen in the first six months. Data maintained with BigMint reveals, crude steel production cuts deepened, real estate continued to lose ground, infra investment slowed but manufacturing investment has been inching down m-o-m since March.

BigMint takes a look:

Crude steel production sees sharper decline: China's crude steel production fell a deeper 2.2% over January-July, 2024 to 614 million tonnes (mnt). On a y-o-y basis, the same declined a significant 9% last month to around 83 mnt. This sharper decline can be attributed to severe dumping charges which are now being investigated across geographies where China has been aggressively exporting. Secondly, there are reports of stricter regulations being implemented to curb over-production. After stopping the issuance of permits for coal-based steel plants in H1CY'24, China's Ministry of Industry & Information Technology (MIIT), in a more drastic step, recently issued a policy suspending all new steel plant permits, although, it may be noted, no new steel capacities were added last year either. But, as per the latest news, the ongoing capacity swap has been halted pending new policies as irregularities crept into the system, which actually led to increased production! Capacity swapping indicates replacing old plants with reduced new capacity to discourage a mill from opting for a larger blast furnace.

Thirdly, production cuts are meant to dovetail with China's decarbonisation policy which had been put on the backburner in the immediate aftermath of Covid as authorities at that juncture were more concerned with kick-starting a pandemic-ravaged economy. China aims to achieve carbon peaking by 2030 and net zero by 2060.

Fall in crude steel production also dragged down pig iron output almost 4% across these seven months to 510 mnt.

Iron ore imports rise amid falling prices: China's iron ore imports rose 6.70% to around 714 mnt in the last seven months. But, prices fell to sub-$100/t in July amid lower crude steel production, continued weak downstream demand and falling finished steel prices. However, overall, imports were on the higher side cumulatively, pulled up by the 1.6% higher crude steel production over January-February and 2.7% m-o-m in May, this year. In June too, production was up a marginal 0.2% m-o-m. These intermittent production spikes can be attributed to China's aggressive export policy that is off-setting the fall in home demand. Secondly, the falling ore prices encouraged procurements. Data reveals, the Fe62% imported from Australia has been falling m-o-m from $118/tonne in May to $106/t in July and further in August so far. That apart, ore inventories have piled up at Chinese ports, further pressuring down prices.

Steel exports rise but pace slows: Chinese steel exports rose 22% to 61 mnt over January-July, 2024. But, steel imports naturally dropped 7% to around 4 mnt in this period under review, amid poor domestic demand. Of course, the dried-up home demand, especially from the property sector, the largest consumer of steel, has been responsible for pushing out China's finished steel to other shores, using pricing as a potent tool in the endeavour. Chinese HRC export offers have fallen 13% in January-July, 2024 to $541/t FOB against $619/t FOB seen in the same period in 2023. But, at the same time, other economies are also beginning to take guard against this aggressive dumping stance, which is slowing down the pace of exports.

Manufacturing investment growth dips m-o-m since Mar'24: Manufacturing investment growth averaged 9.34% in January-July, 2024 against a far lower 6.8% in the same period last year. However, it may be noted, manufacturing investment growth has been steadily falling m-o-m since March 2024 while factory output slowed for a third straight month in July, indicating recovery in the world's second-largest economy was losing steam. Here, China's indirect steel exports, in which interestingly, over 50% of the merchandise comprises machinery, components and other items related to steel, are giving a leg-up. Meanwhile, automobile production upped 3% to above 16 million units but sales have fallen off from the over 3 MU seen in December 2023 and were down 11.4% m-o-m in July.

Infra investment dips as govt tries to ease debt burden: Infrastructure investment averaged 5.8% in the first seven months against over 8% in the same period last calendar. This falling graph is a cause for concern as it had previously helped to offset the slump in the property segment, to an extent. A possible reason for the slowed momentum could be a government diktat to 12 regions to defer or suspend infra projects to prevent further increase in their debt burden amid squeezed margins and declining profitability. As per reports, these 12 regions may see a 23% y-o-y decline in their capital expenditure in 2024. Except for two, the balance 10 have budgeted for a lower capex y-o-y.

Real estate losing ground m-o-m since Feb: The property sector has not been able to achieve a turnaround ever since the collapse of the realty giant Evergrande in 2021. Data shows the sector has been losing ground almost m-o-m since February this year. It de-grew by almost -10% over January-July, 2024 against -7% in the same period last calendar. Despite some booster shots, realty still bites, dragging down cement production almost 11% y-o-y in this period to 1,002 mnt.

Coal production slips, imports rise: The country's coal production slipped in the period under review amid a slew of mining accidents which led to tightening of safety measures. Thus, production inched down nearly 1% to 2,660 mnt, pushing up imports of the same by 13% to 296 mnt.

Outlook

The outlook for the second half looks a tad weak. The government is more focused on stimulating consumer spending rather than infrastructure and manufacturing although some feel the latter two need policy props too.

Greater fiscal measures and more aid to local administrations are a possibility and which could mitigate the downside risks to the economy in H2. However, bumps remain ahead.