How does China's Domestic Steel Demand look like in the Forthcoming months of 2019?

The year 2019 so far proved to be a very dull year for Chinese steel sector with its steel demand suffering due to country's slowing economy, escalating trade war between U.S. and China, and rising trade restrictions by various countries. Now with only few months left in 2019 let us see if there any chances of demand upliftment from any of China's key sectors:

Steel demand from China's manufacturing sector might see slight revival

As the trade war with the United States continues to gather pace, China's manufacturing sector remain gloomy, with the sector activity contracting for the fourth successive month in August.

The country's manufacturing PMI which is a gauge of sentiment among factory operations has remained below 50 over past eight months whereas 50 is the demarcation line between expansion and contraction in sector activity. This indicates that index has remained in contractionary territory for six of eight months this year.

Now for the remaining months of ongoing year, industry experts are of the opinion that new and higher U.S. tariffs that are scheduled to enter force on 1 October and 15 December could provide some very temporary boost to Chinese exports and therefore manufacturers, should inspire American buyers to make early purchases to pay lower tariff rates which may give slight boost to country's steel demand in next few months.

However, long term trajectory of manufacturing sector is negative, with many manufacturers scoping out or already relocating to production sites outside the world's second largest economy.

Modest outlook for China's construction sector

The property sector which accounts for 30% of country's total steel demand saw a declining growth rate in 2019 as land purchases and home sales fell 29.4% and 1.3% year on year over January-July, respectively. This decline in land purchase and home sales from early-2019 is mainly because during previous years of 2015-2018 country's government gave extra push to the Beijing's property sector by giving monetary and fiscal stimulus measures. But now, the Central government has tightened property developers' financing since July 2019 which will further dent land purchase.

However, low interest rates and low property inventories will guarantee that the slowdown in the property market will be limited, thus supporting the country's steel demand from the property market. By end-July, property inventories had dropped 14 months in a row, down 32% from the peak in March 2016.

In case of infrastructure, the steel demand is expected to remain marginal in the second half of 2019, compared with that of the property sector, as China's fiscal boost to infrastructure is constrained by local government debt.

Auto sector - a big dampener for China's steel demand

According to industry research reports, the automobile market has been the biggest drag on the manufacturing sector's performance in 2019. The automotive sector's output accounts for more than 10% of the country's gross domestic product (GDP), with China's growth rate slowing to 6.3% in the first half of the year amid the trade war with the U.S.

The economic stimulus measures announced by NDRC (National Development Reform Commission) not only removed a mandated increase in new car registrations in places that currently restrict car purchases, but also took out specific purchase incentive tax cuts for rural consumers who buy new vehicles with smaller engines. This means that the country's vehicles purchase is going to suffer in the upcoming months, thus affecting the steel demand from the sector.

Demand from home appliances to suffer

Home appliance output always trails property sales in China, typically by a one to two year lag. The decline in the output growth of home appliances in 2018 was predicted in 2017, when property sales growth slowed to 7.7% year on year in 2017, from 22.5% year on year in 2016.

Property sales growth fell 1.3% on the year over January-July. As a result, the production growth in China's home appliances will soften later this year, weighing on hot-dip galvanized coil demand and prices. The white goods sector accounts for close to 2% of China's total steel consumption, consuming mainly HDG and CRC at a ratio of about 5-to-1.