The China Federation of Logistics & Purchasing Steel Logistics Professional Committee released the steel industry PMI index during the New Year holiday. In December 2015, the index was 40.6%, up 3.6 percentage points from the previous month, moving away from the nearly 7-year low set in November.
Among the main sub-indices, the finished goods inventory index contracted significantly to the lowest level in nearly 28 months, while the new orders index and new export orders index rebounded noticeably. The PMI shows that the downturn facing the steel industry has improved month-on-month, but the steel industry PMI in December was still far below the 50% boom-or-bust line and has been in the contraction zone below 50% for 20 consecutive months, reflecting that the long-term sluggishness of the steel industry has not changed.
Steel mill orders improved significantly
In December, the steel industry new orders index, after falling for two consecutive months, rebounded sharply by 11.2 percentage points to 40.9%, the highest since May this year, indicating that with the initial results of successive easing policies, the current market demand environment has improved, steel mill orders have begun to increase, and sales pressure has eased significantly compared with earlier.
From the demand side, demand in some downstream steel-consuming industries has improved. Among them, supported by rapid growth in fiscal expenditure, large-scale local debt swaps, and special financial bonds, infrastructure investment growth rebounded to 18.2% in January-November 2015. Similarly, stimulated by the policy of halving the purchase tax on small-displacement cars, the national auto market clearly warmed up in November, with both auto production and sales exceeding 2.5 million units. However, demand in most downstream steel-consuming industries remained weak. Due to structural oversupply in the housing market, real estate investment growth fell to 1.3% in January-November, and leading indicators such as new real estate construction area and land acquisition area fell sharply year-on-year. At the same time, output growth in shipbuilding, home appliances, traditional machinery and other industries was sluggish, and they are still in the process of reducing overcapacity. The weakness in downstream industries has transmitted upstream to the steel industry, and falling demand has become the main reason for this year's steel price decline and the industry's difficulties.
In December, the steel industry new export orders index was 47.8%, up 6.6 percentage points from November, the highest in nearly four months, indicating that with the recent slight recovery in international steel prices, steel mill export orders have remained at a relatively high level, and total domestic steel exports are expected to continue increasing later. However, domestic steel exports are currently facing increasing pressure from anti-dumping investigations. In addition, with the rebound in domestic steel prices since mid-December, export prices for some varieties have already inverted against domestic sales prices. Domestic steel exports are expected to remain at a relatively high level later, but room for improvement is limited.
Industry funding tensions continue to intensify
In December, the central bank made a net withdrawal of 20 billion yuan in open market operations, and for the full year of 2015 the central bank made a cumulative net injection of 10 billion yuan via open market operations. At year-end, liquidity remained stable and loose, liquidity conditions were better than expected, and market funding rates continued to decline slightly. According to monitoring by Xiben New Line, on December 31, the discount rate for large bank acceptance bills in Shanghai was 2.85‰, down 4.68% from November 30. Major financial data rebounded sharply in November, with total social financing increasing by more than double month-on-month to 1.02 trillion yuan, and M2 growth reaching 13.7%, a new 17-month high, but the increase in new RMB loans was slightly below expectations. This shows that money supply grew substantially, but financing demand in the real economy remained weak, and transmission from money to the real economy is still hindered.
From the perspective of funding in the steel industry, according to statistics from the China Iron and Steel Association, at the end of November, the short-term and long-term bank loan balances of key steel enterprises were 1,335.9 billion yuan, down 2.25% year-on-year. However, financial expenses in January-November were 90 billion yuan, up 1.88% year-on-year, and the problems of difficult and expensive financing for steel enterprises have not been alleviated. This shows that although the central bank's monetary policy continued to ease this year, it basically did not benefit the steel industry, and the industry's funding chain tensions continue to intensify.
Steel capacity reduction accelerates
The Central Economic Work Conference held in December listed capacity reduction as the first of five major structural reform tasks for 2016. Recently, the National Development and Reform Commission, the Ministry of Industry and Information Technology and other ministries have intensively deployed capacity reduction policies, with the steel industry bearing the brunt, meaning that steel industry capacity reduction will enter a new stage. At the market level, in January-November this year, large and medium-sized steel enterprises in China suffered losses of 53.1 billion yuan, with single-month losses exceeding 10 billion yuan for four consecutive months from August to November, and the operating situation of steel enterprises has deteriorated markedly. Some steel enterprises struggling to survive have already developed a strong desire to exit. This shows that at both the government policy level and the corporate market behavior level, capacity exit and mergers and reorganizations in the steel industry have entered a substantive stage. It is expected that in 2016, some persistently loss-making enterprises in the steel industry will accelerate their exit from the market, while mergers and reorganizations among large and medium-sized steel enterprises will increase, and industry concentration will further improve. The acceleration of capacity reduction and the improvement of industry concentration will be conducive to the healthy development of the steel industry later.
Qiu Yuecheng, senior analyst at Xiben New Line, believes that in December, the demand environment showed signs of improvement, steel mill orders began to increase, and at the same time, steel mill inventories fell from high levels, social inventories declined continuously, and the supply-demand contradiction eased somewhat. The domestic steel market situation has begun to improve, factors for market recovery have increased, the support at the price bottom has become relatively solid, and steel prices are expected to fluctuate upward later. However, considering that winter is the off-season, domestic steel market demand will further decline later. It is expected that in January 2016, the rebound space for domestic steel prices will be limited, with an overall trend of fluctuating upward.