Railway boom
While many local governments are slowing spending due to financial strains,central government investment on infrastructure like railways is growing more rapidly.
Spending growth on railways is running at 25 per cent year-on-year in the first seven months of 2023. Machinery manufacturing has risen 15 per cent and auto output has grown 12 per cent. There’s also a boom in the new energy sector,which isn’t negligible for steel demand. Property investment,meanwhile,contracted 7.1 per cent in the first seven months of the year.
Steel industry forecasts from researcher CRU Group illustrate the divergence between construction and the rest,with demand for so-called “long products” used in building set to fall 1.7 per cent this year. Flat products,the other major category,will see a 3 per cent increase,it said.
Research firm Mysteel said demand for heavy plate used in ships,bridges and wind turbines rose 8.1 per cent in the first five months of the year. The product accounts for about 10 per cent of Chinese steel demand. Other categories covering construction,machinery,appliances and cars were flat or slightly lower.
And even in the property sector,there are some small signs of optimism even as debt risks continue to swirl around the sector,with some state-backed developers reporting a recovery in sales volumes.
‘Lying flat’
The overall result is a market that’s “lying flat,” according to Jiang Hang,head of trading and research at Yonggang Resources — a reference to the much-discussed social phenomenon where citizens do the minimum to get by. Mills aren’t building up much inventory,but they’re still buying when necessary to meet immediate demand,he said.
The resilience in steel demand and iron ore prices is also being driven by some industry-specific factors.
Steel exports have soaked up some extra material,and shipments from China are on track to reach their highest since 2016,although volumes are still well short of the quantities that irked trade partners at that time.
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Iron ore has been helped by cuts at electric arc furnaces that use scrap — an alternative production method for steel. That’s helped keep output derived from iron ore relatively robust. Average daily production of molten iron from blast furnaces has reached its highest since 2020,according to Mysteel.
Steelmakers and traders are also buying up iron ore in anticipation of the seasonal lift to construction activity that occurs after the summer. And mills could be raising their output now to guard against the possibility of government-ordered production curbs later in the year.
“Iron ore prices have deviated a bit from economic fundamentals,largely due to a lack of self-discipline at mills,” said Xu Xiangchun,an analyst with Mysteel. “China’s economy isn’t that promising.”
For the rest of this year,whether China avoids more turmoil in the property sector is likely to be the decisive factor for prices. The lack of confidence in the private sector,and the dangers of local-government debt stress spreading to other parts of the economy,are also strong headwinds.
“China can’t reignite the fire under real estate,and it looks like it doesn’t want to,” said Tomas Gutierrez,an analyst at Kallanish Commodities.
“It does look like there’s a pretty solid floor for iron ore at $US100 in the short term,but longer-term the outlook is weaker.”
Bloomberg