**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 decrease 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 for January fell to 40.7%, marking a sharp decline 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 drop primarily to weak market conditions and the impact 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 downward trend, with prices falling across the board.
**Crude Steel Production Continues to Decline**
January’s sub-index data for the steel industry PMI revealed that the production index dropped to 35.3%, a fall of 11.8 percentage points from the previous month. This marked the fourth consecutive month of contraction, reaching its lowest level since December 2008. The purchase volume index also declined to 40.9%, down 8.3 percentage points from the previous month, remaining below 50% for three months in a row. Meanwhile, the raw material inventory index returned to contraction territory, dropping to 49.6%, a decrease of 5.1 percentage points from the previous month.
Analysts believe that the combined effects of market adjustments and environmental policies will likely keep steel production at a low level in the coming months.
**Demand Falls to “Freezing Point,†but Signs of Recovery Expected**
The new order index for the steel industry PMI in January reached 33.5%, a sharp drop of 12.1 percentage points from the previous month—its lowest point since September 2012, or 17 months. This marks five consecutive months of contraction, indicating that demand has hit a “freezing point†due to weak 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 enterprises in the first half of January fell to 1.28 million tons, a 3.48% decline from the first ten days of December 2013.
However, the finished goods inventory index rose to 52.4% in January, marking the first time it entered the expansion zone after three consecutive months in contraction. This increase of 4.9 percentage points from December 2013 made it the only sub-index to rise among the 11 categories.
Analysts suggest that this reflects the pressure on steel companies to manage their inventory amid weak demand and delayed orders. They predict that if capital constraints persist, steel mills may intensify destocking efforts, further increasing market supply and putting more pressure on prices.
Despite the current challenges, analysts noted that demand typically rebounds after the Spring Festival, and this year is no different. With construction activity picking up and funding conditions improving, real demand is expected to grow gradually, leading to a potential market recovery.
Under the influence of environmental regulations and the elimination of outdated production capacity, steel output growth is expected to be curbed. Additionally, with steel prices already at a low level, there is limited room for further declines. After the Spring Festival holidays, as businesses resume operations and procurement needs return to normal, the steel market is expected to stabilize and show signs of improvement. In February, domestic steel prices are likely to remain stable, with minor fluctuations as the market consolidates.
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