Less than a third of migrant workers have returned to their jobs, stagnating construction activity

Chinese mills will need to deepen production cuts in March to offset soaring inventories

Singapore — Chinese steel mills are expected to deepen steel output cuts in March and lower ex-works prices due to depressed end-user demand and mounting finished steel inventories, market sources said Thursday.

Construction and manufacturing activity remains extremely slow in China this week, with less than a third of migrant workers having returned to their employers due to the novel coronavirus, or COVID-19, outbreak, according to S&P Global Platts estimates.

Manufacturing activity has resumed more quickly, but factories are unable to boost capacity utilization rates due to interrupted supply chains.

Only around 27% of migrant workers had returned to their cities of employment after Lunar New Year holidays in the provinces of Guangdong, Jiangsu, Shandong, Zhejiang, Fujian and the municipalities of Shanghai and Chongqing as of February 24, Platts estimates based on passenger data provided by Chinese search engine Baidu.

The migrant workers are also subject to up to 14 days’ quarantine after returning.

The construction gross output value and industrial main business income of these provinces and cities account for 46% and 53%, respectively, of China’s total.

As migrant workers play a pivotal role in construction and manufacturing in these areas, operating rates at construction sites and factories are likely to be extremely low.

Steel traders said spot transactions for long steel products were currently around 20% of the level in the same period after the 2019 Lunar New Year holidays.

One mill source said demand for long steel in February was down 90% year on year; demand for flat steel down 30%-50% over the same period due to a comparatively faster recovery by manufacturers.

According to China’s Ministry of Transport, 39% of railway construction projects had restarted February 24, and 37% of major highway and waterway projects. The restart ratio of airport construction projects was lower at 26%.

No workers on the construction of Zengjiayan bridge in Chongqing on February 25, 2020. Source: S&P Global Platts

PROPERTY SLOWDOWN

Along with the slow pace of restarts, property developers are grappling with a dearth of sales, which has hurt their cash flows. Over January 25-February 22, the floor space of home sales in 30 major Chinese cities plunged 88%, or 8.07 million square meters, from the same period of 2019. Most people remain largely confined to their homes.

Some local governments have stepped up efforts to support property and infrastructure enterprises through measures such as lowering financing costs, easing home purchasing interest rates and land purchase restrictions, and speeding up approvals, investment and construction of major infrastructure projects.

However, China’s central bank reiterated on February 19 that “housing is for living not for speculation” and said it would “not use the property sector as a short-term stimulus to China’s economy.” Some market sources believed any easing in property would be to support the sector’s stability.

Though local governments have been pushing for the launch of new infrastructure projects in a bid to offset the slump in the current quarter, it takes time from getting approvals to starting construction, one market source said, adding any stimulus in infrastructure construction may not be felt until mid-2020.

SMALLER MANUFACTURERS STRUGGLE

Restarts in the manufacturing sector are occurring more quickly, but it takes time for supply chains to return to normal.

China’s top 500 manufacturers had increased capacity utilization rates to an average of 60% as of February 21, according to the China Enterprise Confederation or CEC, which is supervised by China’s Economic and Trade Commission. The utilization rates of state-owned enterprises are generally higher than for private enterprises, CEC added.

However, steel market sources said capacity utilization rates at smaller manufacturers were likely to be much lower due to shortages of labor and protective gear, as well as difficulties in meeting more stringent protection protocols imposed by local governments.

According to the Ministry of Industry and Information Technology, only about 30% of small- and medium-sized enterprises had restarted as of February 25.

In Chongqing municipality, a vehicle manufacturing hub bordering the coronavirus outbreak center of Hubei province, the vehicle assembly factories had mostly restarted in the week of February 24.

However, operations at most local auto parts makers, which are usually smaller and private enterprises, remain suspended due to difficulties in meeting strict protection protocols, some local steel traders said. They said the vehicle industry has long and complex supply chains, and until the whole supply chain returns to normal, many factories will be unable to lift capacity utilization rates.

Manufacturing and construction are expected to recover from March, which should help support steel demand in the second quarter.

Some Chongqing-based market sources said in districts marked as low or medium risk, a few construction sites had received approvals to restart in the week of March 2. More manufacturing factories are also likely to restart.

However, opinions were divided over likely steel demand in Q2. Notwithstanding the extent of any government stimulus, towering steel inventories will need to be worked through and supply chains restored before any significant growth can occur.

China will need to grow its economy by at least 7% over April-December to make up for almost no growth in Q1 to meet 2020 targets, market sources said. But a big stimulus package may only create problems further down the track, as was the case after the 2007-08 stimulus, one source noted.