China's property construction sector will be the major driver of steel demand over the remainder of 2019, while manufacturing and consumer goods such as cars and white goods will offer limited support for steelmakers.
Here we offer a sector breakdown:
The declining growth rate of new property starts in 2019 is in line with market expectations, after land purchases and home sales fell 29.4% and 1.3% year on year over January-July, respectively. However, the slower growth rate of new housing starts is not expected to adversely impact demand for steel in 2019 and probably in 2020 as well. Though it may seem weaker compared with 2018, which was a particularly strong year. Property construction accounts for more than 30% of Chinese steel consumption.
The decline in land purchase and home sales from early-2019 is mainly because demand from home buyers was pulled forward to 2015-2018 because of Beijing's monetary and fiscal stimulus measures. Central government's measures to tighten property developers' financing since July 2019 will further dent land purchase.
However, low interest rates and low property inventories will guarantee that the slowdown in the property market will be limited. By end-July, property inventories had dropped 14 months in a row, down 32% from the peak in March 2016. Some steel market participants expect property new starts to continue to rise yearly, at least through 2019. The new starts may begin to retreat in 2020, but only in relation to the high base in 2018 and 2019.
The Chinese domestic rebar margin, currently at minus $9.70/mt, according to S&P Global Platts Analytics, is likely to regain upward momentum from late-August or September, when seasonal construction demand returns.
The incremental steel demand from the infrastructure sector, however, is expected to remain marginal in the second half of 2019, compared with that of the property sector, as China's fiscal boost to infrastructure is constrained by local government debt.
The amount of local government bonds -- the main financing channel for infrastructure construction -- issued in China in July retreated 38% month on month to Yuan 555.9 billion, after the bonds issued in June reached a three-year high.
Chinese manufacturing is expected to stop deteriorating in the remainder of 2019, as stimulus measures to boost domestic consumption take effect, leading the manufacturing PMI to rebound in July.
However, global trade tensions, insufficient orders and overcapacity will persist, as China's transition from low-end to high-end manufacturing will take several years to complete. China plans to complete the transition by 2025. This means China's manufacturing industry may have bottomed out in the third-quarter, but is far from getting out of its slump.
As a result, flat steel demand from the manufacturing sector is expected to improve from August or September, taking hot-rolled coil producers back to positive margins. Chinese domestic HRC margins fell to minus $27.15/mt as of August 12, S&P Global Platts data showed. The HRC margin averaged $37.82/mt from January to mid-August. The average margin in the remainder of 2019 is expected to improve slightly from this level.
The vehicle market has been the biggest drag on the manufacturing sector's performance in 2019. The China Association of Automobile Manufacturers predicts China's vehicle sales will decrease 5% year on year in 2019, an improvement from the 12.4% on the year drop in H1 2019.
Some steel mill sources said in tandem with slower decline in vehicle output, cold-rolled coil demand from vehicle manufacturers had shown signs of a recovery in August.
The CRC profit margin has also improved in August, and is expected to sustain into Q4, although at a slower pace.
The spread between CRC and HRC, the substrate for rolling into CRC, has increased from Yuan 331/mt ($47/mt) in early-July to Yuan 540/mt ($76/mt) as of early-August.
Home appliance output always trails property sales in China, typically by a one to two year lag.
The decline in the output growth of home appliances in 2018 was predicted in 2017, when property sales growth slowed to 7.7% year on year in 2017, from 22.5% year on year in 2016.
Property sales growth fell 1.3% on the year over January-July. As a result, the production growth in China's home appliances will soften later this year, weighing on hot-dip galvanized coil demand and prices.
The white goods sector accounts for close to 2% of China's total steel consumption, consuming mainly HDG and CRC at a ratio of about 5-to-1.
Source: S&P Platts