China's steel PMI falls to record low in February

China's steel sector purchasing managers index (PMI) slumped to a record low in February as the coronavirus outbreak disrupted downstream demand, resulting in steel mills reducing output.

The steel PMI fell by 10.5 points from the previous month to 36.6, the lowest level in the history of the index that has been compiled since January 2016 by the China steel logistics professionals committee (CSLPC). The sharp drop in steel PMI was in line with the official manufacturing sector PMI crashing to a record low of 35.7 in February from 50 in January, as the manufacturing sector production and demand for products slowed. A reading below 50 signals a sector's contraction, with above 50 showing its expansion.

The steel production sub-index fell by 15.4 points from a month earlier to 31.3, while the new domestic orders sub-index slipped by 11.7 points at 32.7.

Demand for steel collapsed following the impact of the coronavirus outbreak amid delays in resuming work at downstream companies. Demand for steel from overseas markets also reduced significantly, said the CSLPC. "It is expected that in March, as the epidemic situation continues to be controlled, the construction sites of enterprises will start to resume work, demand will accelerate and the relaxation of logistics will also help steel mills to produce and sell," it added.

Several steel mills shut blast furnaces and carried out maintenance last month to reduce operating costs and avoid adding to unsold inventories. Mills also sharply reduced purchases of raw materials such as iron ore, coking coal and scrap while depleting existing stocks, the CSLPC survey showed. Some mills have been selling part of their long-term contracted iron ore cargoes in spot markets over the past few days, according to China market participants.

Finished product inventories increased at mills, with the inventory sub-index in February rising by 12 points from a month earlier to 57.7.

While most construction sites were inactive in February, they are expected to resume work at a faster pace this month. With most of the construction companies understocked with steel products, "a wave of demand release for steel" could happen this month, said the CSLPC.

By Prasenjit Bhattacharya

source: Argus Media