Rebound in China's manufacturing steel demand to buoy iron ore prices: S&P Global

S&P Global said that China's manufacturing steel demand rebounded in August and expects conditions to improve further in September and October thanks to higher seasonal manufacturing activity.

Still, sources said that overall volume is "likely to remain modest amid a weak property sector and low household consumption."

"Evidence of this was also seen in August, when volumes were the third lowest so far in the year despite seeing a month-on-month growth."

A Chinese Steel-related Manufacturing Production Index produced by S&P Global came in at 107 points in August, up 7 points from July.

"However, the index was still lower than 110 points in May and 118 in June, when China started recovering from widespread lockdowns and industrial stoppages caused by a resurgence in COVID-19," noted the S&P analysts.

Source: S&P Global Commodity Insights

Modest rise from July lows

The Steel-related Index observed several month-on-month and year-on-year increases across the 18 manufactured goods it tracks.

Goods such as machineries, vehicles, shipbuilding and railway facilities posted year-on-year gains in August. While home appliances, power generation facilities and containers still experienced a year-on-year decline.

"Vehicle production and shipbuilding rose 39% and 35.7% on the year in August, respectively, contributing the most to the upward movement in the entire manufacturing sector," observed S&P Global.

"Meanwhile, production of engineering machineries also rebounded in August as the infrastructure sector gained momentum from a fiscal stimulus."

"Excavator production in August increased 10% on the year, returning to year-on-year growth for the first time since April 2021."

A bounce off rock bottom

The data from S&P Global supports the growing view that China's steel production bottomed in July. But that's hardly reassuring given things have only just started to improve from rather dire levels.

"Property construction is still a long way from seeing recovery, which is the key problem behind China's depressed steel demand," market participants told S&P Global.

While a fragile bounce is currently in play, the next catalyst will be the 20th Communist Party Congress held in October.

AMP Capital Chief Economist Shane Oliver said he expects Congress to ease up on its 'zero tolerance' stance on covid and stimulate more, which may support iron ore demand. Although the key risk is what happens if it doesn't and the global economy continues to weaken.

Recap of iron ore prices

Commodity markets have pulled back sharply in the past week as the global central bank battle against inflation starts to get messy. The Bloomberg Commodity Index hit an 8-month low overnight, reflecting broad-based weakness across hard and soft commodities.

Iron ore has managed to buck the trend, trading around the high US$90s for the past week.

Singapore iron ore futures (Source: TradingView)