China's steel purchasing managers index (PMI) for August fell by three points to 44.90 on the back of fewer new orders and rising inventories.
The steel output sub-index rose by 1.6 points to 50.1 showing higher production in August compared with July, said the China steel logistics professionals committee (CSLPC).
Apart from some increase in output of existing enterprises, there was also higher production from steel mills that had been allowed to set up new production facilities as part of capacity replacement projects. There may also have been some increase in output at chronically loss-making "zombie" mills, said the CSLPC.
Chinese mills have shown little inclination in reducing output despite lower profit margins. Margins are currently at around 100-300 yuan/tonne ($14-42/t) compared with an average of Yn1,000/t during most of 2018. A sharp fall in iron ore prices supported profit margins in August despite continued fall in steel prices.
The new orders sub-index fell by 8.3 points to 37.5, showing a sharp deceleration in domestic demand for the fourth straight month. Hot and rainy weather in August slowed construction work and pressured steel offtake. But there are expectations of increase in steel demand this month, as September and October are seasonally the busiest months for steel sales.
China's steel stocks in August in 20 major markets increased by 10.3pc from the previous month to 14.02mn t, according to the China iron and steel association Cisa.
China's official manufacturing PMI slipped to 49.5 in August from 49.7 in July.
Steel prices may get a lift from expected production restrictions starting in mid-September to control emissions ahead of the 1-7 October celebrations of China's 70th national day in Beijing.
China's cabinet, the state council, reiterated on 31 August its stance of expanding infrastructure investment and maintaining sufficient liquidity in the market. The council said counter-cyclical measures, government-speak for stimulus, will be increased while availability of loans for consumers and corporates will remain ample. The financial sector has been directed to support infrastructure investment in addition to the special bonds being issued by provincial governments for such investments.
Despite Beijing's repeated pledges of expanding infrastructure investments, actual investment during January-July increased by around 3.8pc. Beijing has refrained from cutting its policy lending rates that could have a more immediate impact on demand from steel-consuming sectors such as real estate and automobiles. Real estate investment growth remains robust at over 10pc during January-July but housing sales in area terms have fallen over the past few months.
Beijing's reiteration of support to the infrastructure sector lifted the Dalian commodity exchange iron ore futures contract by 5pc and the most active rebar contract by 1.85pc in early trading today.
