Signs of improvement in China's auto market are positive for steel demand

Growth in China's domestic auto market in August sent a positive signal to the manufacturing sector and will help support flat steel prices in the coming months.

Passenger car production in China rose 9.1% from the previous month in August, while sales rose 5.4% from the same period.

This came after production and sales volumes fell 3.8% and 15.9% m /m in July, respectively.

While YTD and August sales are down 2.1% and 9.9% year-on-year, respectively, the monthly recovery is expected to continue in September and October, with production and sales likely to return. to last year's levels.

Growth in the passenger vehicle sector could boost demand for automotive sheets and lead to higher margins for cold rolled steel coils, the main steel product used in passenger vehicle manufacturing.

Shanghai-based Baosteel, a leading Chinese manufacturer of automotive sheets, recently increased its high-strength CRC prices by 150 yuan /ton ($ 21 /ton) from the previous quarter. The move was interpreted by the market as a sign of a recovery in demand for automatic sheets.

Combined with higher demand, the spread between Chinese CRC and hot rolled coil prices rose to an annual high of 555 yuan /tonnes on Tuesday, up 25% since late July, S&P Global Platts estimates showed.

However, despite the optimism, some sources in the steel market remain skeptical that China's auto industry - which went backwards for the first time in 2018 since the early 1990s - will noticeably improve any time soon.

As with steel, China's auto sector also has overcapacity, while domestic demand has generally declined.

Sources said that CRC production in China is likely to increase in September and October on the back of improved demand and margins, which will affect prices. There was a slight increase in CRC production in China, which also contributed to the recent recovery in margins.

In January-July, China's cold-rolled sheet production rose just 2.5% year-on-year to 18.69 million tonnes. By comparison, HRC production grew 11.5% year on year and 20.7% over the same period.