We're about to get a huge clue on the true health of Chinese industry

Derek Zoolander, blue steel exporter. Source: Village Roadshow.

One of the biggest sources of global demand this year has been the government-led stimulus splurge for China’s industrial sector.

According to Vivek Dhar, a mining and energy commodities analyst at the Commonwealth Bank, we’re about to get a vital clue as to whether its ability to drive Chinese industry is sputtering out.

Dhar believes Chinese steel production data for August — released tomorrow — will go a long way to determining what lies ahead.

The reason for Dhar’s interest in the data, aside from his title, is that Chinese steel exports tumbled in August, a stark divergence to the trend seen in recent months.

“Net steel product exports fell 9.3% y/y and 13.8% m/m to 7.2 million tonnes in August, the lowest level since February,” wrote Dhar in a research note on Monday.

He suggets that “China‚Äôs steel exports may finally be responding to trade barriers put in place by countries like US, Europe and India, as they try to protect their respective domestic steel industries”.

This chart shows net Chinese steel exports — simply import volumes minus exports — going back to August 2010. Though it’s high at the moment, it appears the rapid growth of recent years is now starting to flatten out.

Given the recent slowdown in external steel demand, Dhar believes that Chinese steel production data out tomorrow has now taken on added significance, not only the outlook for Chinese economic growth, but also bulk commodity prices.

“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,” he says. “However, if the fall in exports was due to a decline in steel output, it could signal that Chinese stimulus measures are fading.”

Given recent strength in commodity prices such as coking coal and iron ore — two key steel making ingredients — this figure will be watched closely, particularly should it reveal that the slowdown in export volumes mirrored that seen in production volumes.

All will be revealed when China’a National Bureau of Statistics releases industrial output, retail sales and fixed asset investment figures for August at Midday AEST on Tuesday.

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