China's slowing construction activity to keep steel markets under near-term pressure

The downtrend in China's construction activity, which has been slowing since April due to a weaker-than-expected property sector, is expected to continue into June, keeping Chinese steel prices under pressure, industry sources said May 23.

The weakness in the construction sector is expected to be led by a seasonal slowdown, while some positive momentum in infrastructure construction is unlikely to offset the slowdown in new home starts, the sources said.

The operation rate of China's engineering machineries, jointly created by CCTV Finance, Sany Heavy Industry and Rootcloud, declined to 64.69% in April from 65.05% in March, their data showed.

Some mill sources and traders said steel demand from infrastructure construction was relatively strong in April, but the slowdown in property steel demand was significant.

China's new home construction starts dropped 32.7% on the month and 28.3% on the year in April, data from the National Bureau of Statistics showed.

China's construction steel production was already on a downtrend in April, but end-user demand fell even faster, leading to a rapid drop in steel prices.

The daily rebar and wire rod output in China declined 5.8% on the month in April to 1.12 million mt, but was 1.2% higher on the year, the NBS data showed.

In light of the weaker steel demand, Platts assessed Chinese domestic rebar prices Yuan 588/mt ($83.70/mt), or 13.7%, lower from the start of April to Yuan 3,690 on May 19, S&P Global Commodity Insights data showed.

Some sources do not expect China's construction steel demand to improve in May-June, not only because of a weak property sector, but also due to the fact that China might focus on fiscal support to infrastructure in the third quarter, instead of the second quarter, in order to ensure a smooth year-on-year economic growth.

China's economic growth was hard hit in Q2 2022 as a large number of major Chinese cities were under COVID lockdown. The economic activity subsequently rebounded strongly in the next quarter, which should weigh on the year-on-year growth in Q3 2023 due to a high base.

China issued Yuan 1.622 trillion of new local government special bonds over January-April, designed to mainly support infrastructure projects, 15.7% higher than in the same period of 2022, according to data by the People's Bank of China.

However, this kind of fiscal support is likely to fall below the year-ago May-June level, before climbing again in July-September, some sources said.

"I think steel demand and steel prices may rebound in August-September, as a result of fiscal boost to infrastructure sector and its spillover effect to manufacturing. But the upward momentum may be modest, unless government-mandated steel output cuts can be triggered," a mill source said.

China will keep its 2023 crude steel output within 2022 levels, but it remained unclear when the mandated steel output cuts will be triggered, he added.