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China's manufacturing production index for steel consumption produced by S&P Global Commodity Insights stood at 110 points in May, 9 points higher than in April but still down 5 points from the same period of 2021.

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Despite further improvement seen in China's manufacturing activity in June as it contained a pandemic resurgence, the strength of the recovery has remained sluggish, leading to the recent sharp drop in steel prices, industry sources said.

The steel consumption index is based on production data from China's National Bureau of Statistics for 18 steel-related manufactured goods, categorized into seven sectors and weighted according to their share of steel consumption. The monthly production average in 2018 is used as the baseline of 100.

In May, the energy sector that includes power generation facilities posted a year-on-year increase, while all other sectors including machineries, vehicles, home appliances, shipbuilding, containers and railway facilities posted year-on-year declines.

China's steel demand from the energy sector, including power generation facilities, remained healthy in June, sources said. However, this sector did not show much incremental demand compared with the level of a year ago, the sources said.

Meanwhile, vehicle production and related auto sheet demand in June was expected to return to or even exceed the level of a year earlier, sources said.

Rising demand from the vehicle sector is mostly led by China's vehicle industrial supply chain having almost returned to normal after the pandemic, according to sources. Other factors that aid the sector is delayed demand in April-May shifting to June, and the government offering subsidies to car buyers, the sources said.

Despite this, China's vehicle output in May was still 4% lower than a year earlier at 1.993 units.

As vehicle demand picks up pace, two other key sectors are indicating weak growth over the rest of the year.

Steel demand from the home appliance and construction-related machinery sectors was expected to remain weak for the rest of 2022, undermining the demand recovery in vehicle and energy-related sectors.

Manufacturing in the home appliance and construction-related machinery sectors typically follow trends in the property sector, which is going through a weak demand phase that is unlikely to see any reversal before year end, sources said.

"The main focus for the property sector in 2022 is debt restructuring, which means even if the property sales improve in the following months, they [sales revenue] will be used to ease the debt crunch, not business expansion," a source said.

Moreover, stalled household income and shrinking overseas demand will also dampen the consumption of home appliances.

"Back in May, many steel market participants expected steel demand in the manufacturing and also construction sector to rebound strongly in June after the COVID [resurgence] was contained," another source said.

"But now it turns out any rebound is unlikely to be strong amid sluggish domestic consumption and a slowdown in property construction, which in turn has badly hit market sentiment recently and also intensified the steel supply glut," the source added.

As a result, China's domestic hot rolled coil prices, an indicator of the flat steel market mainly targeting the manufacturing sector, fell 13% or Yuan 610/mt ($91/mt), from the start of June to Yuan 4,270/mt June 20, according to assessments from S&P Global.

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