The Purchasing Manufacturer’ Index (PMI) of China’s iron and steel industry (CIS PMI) stood at 42.8% in February, according to latest data released by the China Federation of Logistics and Purchasing (CFLP).

This is the second straight month for the country’s iron and steel PMI has stayed below 50% indicating a contraction in demand growth. CIS PMI was 47.9% in January, representing a slight drop from December 2011.

China’s domestic iron and steel market has continued to show a sluggish performance since the fourth quarter of last year. But as the weather turns warm in March, more construction work will begin, which is expected to push up iron and steel demand in the country.

Such a glut was structural, as blind expansion of steel production was mainly made by small and medium-sized companies while large steel mills were slowing down growth of their production capacity. Besides, the export rebate policy is also considered a reason for China to delay reforming to its steel industry. If the export rebates are lowered or cancelled, steel exports would drop significantly.

However, judged from the recovery of the country’s overall PMI, dimming impacts of the European debt crisis on the global economy, and good news for the domestic economy, China’s macro economy tended to stabilise. Chinese demand will remain a major engine of the global iron ore market but a structural overcapacity problem may be a major obstacle to China’s iron and steel industry. The sector has entered the later period of adjustment, which started from the fourth quarter of last year and the steel prices were expected to pick up in mid to late March.

Pressure on capital projects, unreleased demand and the prudent attitude of steel distributors has resulted in large stockpiles.

China’s steel exports will likely be 50Mt in the year, and imports 15Mt.

The rate of growth of steel consumption in China has fallen since June, as the country’s efforts to curb inflation have slowed fixed-asset investment. The ministry said it expected a fall in steel price this year due to waning demand.

The world economy is unlikely to see a rapid recovery in 2012, with its growth rate slowing to around 3%, according to estimates from several international institutions.

Source: China Metals e-mail