China's manufacturing steel demand takes hit from COVID-19 outbreak; recovery to be slow

China's manufacturing activity, especially in the country's economic hub of Shanghai and nearby areas, has been showing recovery signs since mid-May. However, the pace of recovery has remained slow so far and steel demand from the sector is likely to stay lackluster until manufacturing production could return to normal in June.

China's manufacturing production index of steel consumption produced by S&P Global Commodity Insights stood at 102 points in April, plunging 28 points from the same period of 2021 and by 16 points from 2020.

The production slump of manufactured goods was in line with market expectations, as the virus outbreak disrupted China's manufacturing activity and hit supply chains across the country in April.

The production index is based on data from China's National Bureau of Statistics for 18 steel-related manufactured goods, categorized into seven sectors and weighted according to their share of steel consumption. The monthly production average in 2018 is used as the baseline of 100.

In April, all the seven sectors, including machineries, vehicles, home appliances, shipbuilding, containers, railway facilities and power generation facilities, saw a decline on both year-on-year and month-on-month basis.

As the pandemic caused a much smaller impact on steel production in April than on demand, oversupply in steel markets has led the Chinese hot-rolled coil margins to plummet to minus $45/mt at the end of April from about $86/mt early-April, S&P Global data showed.

In particular, vehicle production was hit hard by the outbreak in April, falling 44% on the year, as lockdowns in Shanghai and northeastern Jilin city disrupted not only local production but also the entire country's supply chains.

Each of these two cities produce about 11% of the country's total vehicle production, according to the China Passenger Car Association.

China's home appliance sector, another major consumption-related manufacturing industry, saw its production fall 21% on the year in April.

Along with the pandemic-led disruption, factors such as slowing property sales, stalled household income as well as shrinking overseas demand have also played a part in the slowdown in home appliance consumption and production.

Excavator production, an indicator of construction-related machineries, was down 59% on the year in April as problems from an already-sluggish construction activity was compounded by movement restrictions in response to the outbreaks.

Slow recovery in May

The recovery in China's manufacturing activity and related steel demand remained slow as of May 19, as places where cases were contained were still careful about lifting restrictions, market sources said.

Close to 65% of Shanghai-based mid and small enterprises resumed operation as of April 19, but 80% of these operating enterprises saw a dismal utilization rate of below 50%, according to state-run People's Daily newspaper.

A few market sources said oversupply in China's steel market was unlikely to ease in May and even in June, keeping steel prices and operating margins under pressure, unless steelmakers cut back production from April level.

China's crude steel production in April was 5% lower on the year at 92.78 million mt, but still was elevated to strike a balance with slumping steel demand.

"Operations at manufacturing sector may more or less return to normal in June, but people's income and consumption confidence, that is, the demand for manufactured goods, have been hit by the COVID-19 resurgence, which will take a longer time to recover," a source said.

As of May 19, the Chinese domestic HRC sales margin was still at minus $44/mt.