China – slowing or slumbering?


The world’s second largest economy seems to be suffering from a bout of ‘flu with signs and symptoms emerging of an imminent slowdown after the post-labour holidays.

One sign of China’s decelerating economy can be shown in the seven-month low of the Caixin/Markit Purchasing Manufacturing Index (PMI) which at 50.3 during April 2017 was well below economists’ estimates of 51.0.

The April level indicated that the private industrial sector in China had shown a slower pace despite the economy still being in expansion mode – as indicated by the index remaining above the 50.0 mark. So far, economists have attributed the slowdown to the cooling measures introduced the Chinese government to curb the red-hot Chinese property market, which in turn affected the prices of construction materials such as steels and iron ore.

Not-so-hot property. While the government’s attempts to cool the red-hot property market partly contributed to the lower CM PMI the official manufacturing PMI which includes most of the state-owned enterprises in China noted that growth in the service sector also decreased to 54.0 as compared to a 55.1 level in March 2017.

With both manufacturing and services indicators hitting the brakes in April, there seems no doubt that the analyst/economist view of slowing growth for China ahead is justified.

Lower iron ore and coking coal imports in April. China imported a total of 83.27m tonnes of iron ore in April, down 3.7% month-on-month, according to Thomson Reuters Supply Chain and Commodity Forecasts. The decline in the country’s imports was traced partially to supply disruption in Australia, caused by the recent cyclone.

Moreover, the sharp decline was also attributed to overbuying of imports seen over the past 13 months, which iron ore prices triple in the process, resulting in a market that was well over-supplied and unable to absorb an additional 100m tonnes of new low-cost production from Australia and Brazil over the next two years.

Similarly, the country’s imports of coal also fell in April to 18.95m tonnes, down 2.8% month-on-month due to cyclone-related logistics problems. Thomson Reuters Supply Chain and Commodity Forecasts estimate that coal imports from Australia dropped almost 32% month-on-month to 5.67m tonnes in April 2017 as a result of Cyclone Debbie’s damage to the Goonyella rail system in Queensland forced miners to declare force majeure.

Spot iron ore prices fell more than 10% last week. Due to weaker seaborne demand and the rising port inventories in China, the spot iron ore price suffered its biggest loss of the year at 10.3% last week. Iron ore futures on the Dalian Commodity Exchange (DCE) had also retreated 8.2%, marking its biggest decline since December last year.

The Tangshan billet prices – often used as steel demand barometer – slumped by nearly RMB 160 to RMB2850 last Friday, before rebounding gradually to RMB 2920 over the weekend. The price fluctuation reflected the volatile market as well as the strategy of iron ore buyers of sitting on the sidelines waiting for clearer market direction. A China-based trade source indicated that it is difficult to pinpoint market direction as most mills expected a mandatory output cuts to be implemented ahead of the upcoming One Belt One Road conference held in Beijing next week.

As a result, many mills are unwilling to commit to fresh buying as there is no need to restock inventories at the moment. Moreover, it was heard that the some Chinese provinces are cutting down on spending, in order to curb rising debt levels. The spending cuts have prompted lower steel consumption and iron ore demand overall on a provincial level.

In the meantime, steel output will be reduced in some Chinese provinces with the commencement of environmental protection inspection taking place until May 17. The provincial administration office of Hebei province has since conducted inspections in cities such as Tangshan, Shijiazhuang, Baoding, Cangzhou, Langfang, Hengshui, Xingtao and Handan. The inspection seeks to improve the air quality in Hebei, which in turn may affect the steel output in the province, as the mills that fail the emission guidelines are expected to suspend operation.

Too much coking coal supply. Coking coal buyers have sat out of the recent downward market, hoping to liquidate their positions until prices settle at pre-cyclone levels. Currently, the market is awash with oversupply due to end users’ first wave of restocking in early April 2017.

An Australian trade source stated that some end users had simply bought too much as they expected the cyclone-related supply disruption to last longer and have a greater impact in the market. Some steel-makers were heard to even opt to delay or postpone their term-contract shipments as they have sufficient inventory at the moment from spot purchases, while others are well-supplied and anticipating for further falls in prices to normalize at pre-cyclone levels.

Meanwhile, the negotiation for Q2 benchmark prices is expected to re-commence this week as no offers were made last week. A trade source indicated that the Japanese steel-makers may settle around the USD200/mt FOB Australia with their suppliers in Australia.

China’s demand still ‘very strong’ for the year. Despite the welter of bad news, China’s demand for iron ore still remains positive for 2017, according to Fortescue Metals Group CEO Nev Power. During a media conference, Power highlighted that the Chinese economy is still in good health with consistent demand for iron ore and steel.

To Power, China will remain key driver in the sector for the long term, with its average production of nearly 800 million tonnes of alloy per year. Besides China, the rest of Asia remains a vibrant market for iron ore and steel consumption he said. Despite the scaling down of iron ore prices from the peak USD95/mt seen early this year to the USD67/mt level, Power still felt that the current price levels are still “very strong”.

Slowing or Sleeping?  While it is true that China’s economy slowed down in Q2 as demonstrated by various trade indicators, the country clearly remains the key driver to be reckoned with in steel and iron demand.

FIS believes the quarter’s market hiccups are short-term in nature and there will be clearer market direction after the upcoming One Belt One Road conference. After this event, the country’s steel demand will be largely supported by policy-makers for consistent growth ahead of the election held later in the year.