**Abstract**
According to data released today by the National Bureau of Statistics, China's Manufacturing Purchasing Managers' Index (PMI) stood at 50.5% in January 2014, a decline of 0.5 percentage points from the previous month. On the same day, the Steel Logistics Professional Committee of the China Federation of Logistics and Purchasing reported that the steel industry PMI fell to 40.7%, marking a sharp drop of 7 percentage points compared to the prior month. This was the fifth consecutive month that the index remained below the 50% threshold, hitting its lowest level since September 2012.
Analysts attributed the decline to a combination of market downturns and the influence of the Spring Festival holiday, which led to a significant contraction in business activities across the steel sector. As a result, the domestic steel market experienced a synchronized decline in prices.
**Crude Steel Production Continues to Fall**
The sub-index data for the steel industry PMI in January showed a production index of 35.3%, down 11.8 percentage points from the previous month and reaching its lowest level since December 2008. The purchase volume index dropped to 40.9%, a decrease of 8.3 percentage points, remaining below 50% for three months in a row. Meanwhile, the raw material inventory index also fell into contraction territory, dropping to 49.6%, down 5.1 percentage points from the previous month.
Experts believe that the combined effects of market adjustments and environmental policies are likely to keep steel production at low levels in the coming months.
**Demand is Expected to Improve After Reaching a "Freezing Point"**
Notably, the new orders index for the steel industry PMI in January reached 33.5%, a sharp decline of 12.1 percentage points from the previous month, marking the lowest point since September 2012—equivalent to a 17-month low. Analysts noted that this indicates demand has fallen to a near-freezing level due to both market conditions and seasonal factors.
According to data from the China Iron and Steel Association, the average daily sales volume of 86 large and medium-sized steel companies in the first half of January was 1.28 million tons, a 3.48% decrease compared to the first ten days of December 2013.
On the other hand, the finished goods inventory index moved back into expansion territory in January, rising to 52.4%, up 4.9 percentage points from December. It became the only one of the 11 sub-indices to increase during the period.
Analysts suggest that this reflects the pressure on steel companies due to weak demand and uneven orders from traders. They predict that current inventory backlogs remain significant, and if financial conditions continue to tighten, it could lead to another wave of inventory reduction by steel mills, further increasing market supply pressure.
Domestic steel prices continued to fall in January, influenced by the Spring Festival holiday, as construction sites slowed down, leading to reduced real steel consumption. Additionally, weaker-than-expected stock demand exacerbated the decline in overall demand, further pressuring steel prices.
However, analysts also pointed out that historically, after the Spring Festival, spot demand for steel products typically rises significantly. This year is expected to be no different, with increased construction activity and improved funding conditions leading to a gradual recovery in market demand. As a result, the market may show some signs of improvement.
With environmental regulations and the elimination of outdated production capacity suppressing steel output growth, the pace of production is expected to slow. Moreover, with steel prices already at a low level, there is limited room for further declines. Market sentiment remains strong following the holiday, and after the Lantern Festival, enterprises will begin construction projects, leading to a rebound in procurement demand for normal operations. Therefore, the steel market is expected to stabilize and recover after the holiday, with domestic steel prices likely to remain stable or consolidate slightly in February.
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