Steel demand indicators for China are falling

The Chinese Iron and Steel Association (or CISA) expects the country’s steel demand to drop by 6% this year. CISA’s point of view is much more pessimistic than that of the World Steel Association, which expects steel consumption in China to decrease by only about 0.5% this year.

The CISA forecast seems much closer to the realities of China’s economy. Most of the indicators in the real estate sector in China were on a downward trend. The slowdown in the Chinese steel market had a negative impact on steel producers such as ArcelorMittal (MT), Gerdau (GGB) and Nucor (NUE).

The chart above shows manufacturing PMIs for China (PMIs are economic indicators derived from monthly surveys of private sector companies). The data is compiled by Markit for HSBC. The fact that the PMI indicator was less than 50 for four consecutive months indicates the contraction of production activity.

Also, China is cutting its benchmark interest rates again, for the fourth time since November, to stimulate the economy.

The demand for steel has capped

China’s steel consumption has plateaued, as is evident from the country’s recent economic indicators. As China moves to become a more consumption-based economy, the glory days of double-digit steel demand growth appear to be history.

Can China reduce its excess capacity?

For investors like AK Steel (AKS), US Steel (X) and Ternium (TX), massive steel overcapacity is affecting their business prospects. Steel production capacity, worldwide, has grown massively in the last decade, led largely by China.

The capacity utilization ratio in the steel industry was 72% in May. In general, a ratio of 80% is considered a healthy sign for the steel sector. This massive overcapacity in the steel industry also puts pressure on steel prices.

Although China resorted to aggressive monetary easing, the country’s economic activity is still weak. There is always a time lag before the actions of the central bank start to take effect in the real economy. We will have to wait to see if China’s economic activity recovers.

Article source: http://marketrealist.com/2015/07/china-needs-restore-sanity-steel-markets/

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