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China’s trade data for Jun’23 was subdued as demand uptick in its home market has been less than expected. Key highlights: 1) copper imports in refined form fell YoY for the seventh successive month and copper concentrate imports too slipped MoM; 2) steel exports fell on YoY basis for the first time since Apr’22; 3) thermal coal imports remained robust; 4) aluminium exports increased slightly MoM, though are still lower YoY. Going ahead, we will keep a watch on the demand front despite improvement in credit metrics and money supply in Jun’23. We would also watch out for downstream indicators such as land purchased, automotive sales and excavator sales. However, we believe that the decline in steel exports augurs well for the ferrous space, on which we maintain our optimistic stance. Our key picks in the sector are: JSPL (BUY; TP: Rs750) and Tata Steel (ADD; TP: Rs125).

* Lower copper imports signify demand blues: China’s trade data for Jun’23 indicates slower-than-expected demand recovery. Key points: 1) refined copper imports declined 16% YoY (up by a modest 1% MoM) to 450kte – marking the seventh successive month of decline; 2) copper concentrate imports however rose 3% YoY (but fell 17% MoM) to 2.1mnte – the highest-ever level for the month of July any year. The MoM decline was due to 9 smelters undergoing maintenance in Jun’23 resulting in a cumulative impact of 50kte; 3) steel exports fell 1% YoY (10% MoM) to 7.51mnte as global demand remains subdued; 4) thermal coal imports rose more than 2x YoY (up 1% MoM) to 40mnte – still lower than in Mar’23 and Apr’23 as demand remained stagnant; 5) aluminium exports rose 3% MoM to 492kte as operating capacity in Yunnan province rose by 260kte and that in Guizhou rose 120kte. This was partially offset by a reduction of 250kte in Shandong due to capacity transfer. Going ahead, we expect China’s steel exports to decline further owing to the government’s endeavour to limit production to CY22 levels, implying 58-60mnte reduction while aluminium exports might increase further due to higher operating capacity. As per SMM estimates, domestic aluminium output in China might increase to 3.55mnte in Jul’23 compared to 3.37mnte in Jun’23.

* Credit metrics for Jun’23 are favourable, but will it result in demand growth? In China, credit indicators were ahead of street estimates for the first time after Mar’23. Both aggregate financing and new loans issued in yuan rose MoM and came ahead of the estimates. Aggregate financing at CNY4.2bn was ahead of estimate of CNY1.3bn while new loans issued in yuan were at CNY3bn (against street estimate of CNY2.32bn). M2 supply growth at 11.3% was also ahead of an estimated 11.2%. We have seen similar outperformance for four months in a row from Dec’22 to Mar’23; however, it did not translate into demand growth. Hence, we await downstream data on land purchased, housing price changes in key cities, and automotive and excavator sales before taking a view on demand growth.

* Outlook – Trading data weak, but ferrous counter still favourably placed: China’s subdued trade data is an outcome of slower-than-expected demand revival. Going ahead, we expect steel exports to moderate, as iron ore inventory at ports continues to drop and inventory of finished steel products has not risen significantly. However, aluminium exports might increase as more smelting capacity comes on board. As per SMM estimates, operating aluminium capacity is likely to grow in Jul’23 mainly due to ramp-up in Yunnan province that has been granted 4.194mn units of power for local units to resume production. Besides, more than 800kte of capacity in Yunnan would have resumed production by end-Jul’23. As a result, aluminium might rise and some of it might come into the export market. As a result, we retain our relatively optimistic outlook on the ferrous space with JSPL (TP: Rs750) and Tata Steel (TP: Rs125) as our key picks.

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