Steel Yourself for More Trouble in China
China may not re-enter outright deflation, but it is far from out of the woods
By Nathaniel Taplin
Seasonal steel output restrictions, usually ending in April, will be extended through June in China’s two largest steelmaking cities. Photo: muyu xu/Reuters
Chinese policy makers are worried that recent price gains for steel and other industrial materials aren’t sustainable. That should worry investors, too.
Markets are celebrating the return of Chinese manufacturing to growth in March, based on the most recent purchasing managers index. A surge in both output and prices suggested growth remains strong enough to keep China out of deflation. The last round of falling prices, in 2015, tripped up state-owned steelmakers and nearly upended the country’s financial system, as well as helping tank commodity markets world-wide.
Chinese officials apparently see things differently: Seasonal steel output restrictions, usually ending in April, will be extended through June in China’s two largest steelmaking cities, Reuters reported Monday.
According to the chairman of the China Iron and Steel Association, nearly a quarter of steel firms made losses in the first two months of the year, up 10 percentage points. Pricier iron ore following a Brazilian dam disaster is clearly a factor, but officials obviously doubt buyers in sectors such as housing and infrastructure are really strong enough to bear much higher prices for steel and other industrial goods.
The nitty-gritty of the PMI bears that out. Since mid-2018, Chinese manufacturing output growth has largely outrun new orders—the opposite of the situation from late 2016 to early 2018, when that gap was closing rapidly and global prices were rising. That means downward price pressure. Not coincidentally, Chinese producer price inflation has slowed since then, hovering just above zero in February.
Matters have improved a bit since November, but the gap between the PMI output and orders components is still roughly twice what it was in mid-2018. China may not re-enter outright deflation, but it is far from out of the woods. Markets are celebrating too soon.
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