Torlizzi Base Metals Report: Bears stalk China’s steel industry

China’s no-growth 50 manufacturing purchasing managers’ index (PMI) for November garnered headlines, but a different Chinese PMI figure in the same month is of keen interest to metals producers and recyclers.

The nation’s steel sector PMI tumbled to 45.2 in November compared with 52.1 in October as steel prices in China slid into a bear market. As a result, Chinese steel mills in November 2018 ran up losses for the first time in three years.

The average price of rebar in China is down 21 percent from the peak reached in August, which has caused profit margins to tumble. Rebar producers in Tangshan, China, have seen margins fall to about $43 per metric ton compared with nearly $130 per metric ton as of the end of October. Some producers have incurred a loss for the first time since November 2015, estimated at about $18 per metric ton, according to Channel News Asia.

A contributing factor seems to be the lack of pollution-related winter shutdowns so far. JP Morgan Chase & Co. China analyst Po Wei writes, “According to MySteel’s survey of 247 steel mills, [in late November] daily average pig iron production was down [just] 1.6 percent. The difference between last year and this year is that local governments [are] finding other ways to fulfill environmental protection targets set by the central government. They prefer not to exert too much pressure on local steel companies, which, after all, are the city’s industrial core.”

Wei continues, “Local producers are basically operating under normal production and are [yet] to be told when the season’s actual production curbs will officially begin. JPM View: The impact of winter suspension so far is much smaller than the 15 percent calculated based on earlier government announcements in October and November.”

In the nonferrous markets, November traders attempted to gauge how the G20 Summit in Buenos Aires would affect metals futures. (The result at the G20 was a 90-day freeze on new or raised tariffs between the United States and China but no rollback of existing tariffs.)

Price indices and PMI numbers in China suggest cooling economy activity, although low inflationary pressures could provide room for accommodative monetary policies. This includes the possibility of a continued rebound in infrastructure investment in the near- and medium-term future.

A late November speech by U.S Federal Reserve Chair Jerome Powell indicated he was generally pleased with the health of the financial system while recognizing the need to be ever-vigilant.

U.S. third quarter 2018 GDP growth came in unrevised at a 3.5 percent annual rate. On the positive side, business equipment investment was revised upward while corporate profits also posted a stronger than expected gain. However, consumer spending growth moved downward and overall final sales figures were lower as well.

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The author is managing director of Milan, Italy-based T-Commodity, and can be reached at gianclaudio@t-commodity.com. T-Commodity is a consultancy specializing in market intelligence, risk management and educational services on commodities and foreign exchange markets.