Earlier this week the Commonwealth Bank said markets were about to get a big indication on the health of China’s industrial sector, and, as a consequence of its sheer size, how the overall economy was performing.
After a sharp drop in steel export volumes in August, the question was whether that decline was going to reflect a similar fall in Chinese steel output over the same period.
“If production increased in August and the fall in steel exports was simply due to more steel being sold domestically, it would suggest that Chinese demand remains strong,” said Vivek Dhar, a mining and energy commodities analyst at the bank.
Well, the numbers are in, and that’s exactly what happened.
As steel exports fell output actually rose, indicating strengthening demand from within the Chinese economy.
According to China’s National Bureau of Statistics, crude steel output rose by 3% year-on-year to 68.57 million tonnes in August, marking the fastest increase in percentage terms since June last year.
It also saw output levels over the first eight months of the year rise to 536.3 million tonnes, down a minuscule 0.1% on the same period a year earlier.
It’s no mean feat given great swathes of industry, including steel mills, were forced to shutter or limit production before a meeting of G20 leaders in the Chinese city of Hangzhou that began in late August.
While a bullish outcome for the Chinese economy and commodity demand, the resurgence in output casts doubt on the government’s pledge to remove 100 to 150 million of excess steel capacity within the country over the next four years.
For the moment that seems to be a secondary consideration with authorities seemingly focused on bolstering short-term growth through infrastructure and property investment.
That, in turn, has helped to lift bulk commodity prices, particularly for iron ore and coking coal.
Still, as suggested by Dhar, the acceleration in steel output in August paints a rosy short-term picture on the health of the Chinese economy.
The only question now is how long that will last.
And the only group who can answer that it is the Chinese government itself.
Curiously, Chinese iron ore, coking coal and rebar futures fell further after the data was released, continuing to unwind the massive gains seen in recent months.
At the mid-session break, the most actively traded iron ore, coking coal and rebar contracts traded on the Dalian and Shanghai futures exchanges sit down 3.09%, 3.36% and 1.82% respectively.
These are contracts that expire in January next year, providing some indication that investors — a loose term when it comes to commodity futures in China — believe the recent recovery won’t last.
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