For all the alarm about the state of the Chinese economy and the steel sector in particular, it appears that apparent consumption was pretty decent over the month of May. The level of steel production should annualise at ~850mtpa, which is an upside surprise for most.
Steel production from CISA steel mills in the last 10 days of May was a little weaker than mid-month, although that seems to be fairly standard in terms of seasonality. For the month as a whole, CISA production was up close to 6%YoY (thanks to the weak comps of 2013).
Another decent sign was the drop in inventories at CISA mills, which takes finished steel stocks to levels below those seen in 2013 for the first time this year.
These are only partial indicators, with small mill production rates uncertain. Steel trader inventories are reportedly at reasonable levels.
The best guess we can make from the CISA data is that crude steel production should be up to ~850mtpa for the month when the final data is out at the end of the week. This is likely to entail some revision to last years numbers, as has been the case since the start of this year.
This level of steel production and implied consumption is probably stronger than most were expecting at the start of the year and even just a few months ago when momentum in key sectors became increasingly bearish.
While crude steel numbers have held up well, pig iron production, which is the primary source of iron ore usage, has not been quite as strong, falling in 2014. Indeed, the crude steel to pig iron ratio has risen noticeably in the first 4 months of year, suggesting the data is becoming increasingly less reliable.
Chinese imports of iron ore have been very strong, although at current reported levels of crude steel production, they aren't strong enough to totally displace high cost Chinese production without some destocking.
And this appears to be what is going on, with mills reducing more flexible domestic iron ore inventory first, which has ultimately pushed back onto lower domestic mine utilisation.
While domestic-sourced iron ore inventory has been reduced, imported stocks have been maintained at fairly stable ranges in terms of days of production.
If crude steel production can maintain the resilience we have seen over the last 2 months or so, there would be a good case for being bullish iron ore from current price levels.
The problem is that the risk of capitulation in construction activity and steel production still looks uncomfortably high, with the data released later in the week providing a better picture of the trajectory activity.
So iron ore should stay on the avoid list for now. But if the downturn in construction activity doesn't prove to be too severe, then a bullish iron ore call will start to look more interesting, particularly with some economic stimulus now in train.
