There’s been a series of positive news coming out of China lately, suggesting that the stimulus that the Chinese government rolled out earlier in the year is gaining traction. 

 

Manufacturing PMI jumped from 49.9 in February to 50.8 in March. The recovery was much stronger than anticipated. Similarly, the property market surprised analysts, with the major developers seeing their contracted sales growing by 20% year-on-year in March. Price rises in 70 large cities accelerated to 7.9% during the same month, most substantial gain since Jun-17. Infrastructure investments also rebounded in Q1, growing by 3% after practically flat-lining in 2018. 

 

Property, infrastructure and manufacturing are highly steel intensive, accounting for about 70-75% of steel demand in China. With activity recovering in these three key sectors improving, steel production grew by 10% in Q1. 

 

Although some market participants are concerned about the sustainability of the recent surge in demand, high-frequency data confirm the recovery and warrant further gains in coming months.  

 

Steel margins collapsed in November last year after a series of disappointing economic data and intensifying concerns about a global slow down. Margins have more than doubled since they bottomed out in late February. As of 22 April, Chinese mills are making CNY860 (abt $128pmt) of profit per tonne of steel they produce, up from CNY403 (abt $60pmt) on 22 Feb. 

 

Although margins are still low compared to the highs of 2017-18, they are quite healthy, especially considering the surge in raw material costs since the Vale incident*. Currently, 80% of steel mills are profitable, up from 69% since the beginning 

 

Blast furnace utilisation is also up sharply. Weekly data show that utilisation rate jumped from 62% in mid-March to just over 70% in mid-April. Current rate is the highest since Jul-18 and three percentage points higher than in April 2018.

 

Source:Arrow

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