Activity in China's steel industry expanded at the fastest pace in a year in May, industry data showed on Wednesday, with a rise in new orders giving mills in the world's top producer incentive to further ramp up output.
However, risks in the market are growing as prices hit historic highs, the China Federation of Logistics & Purchasing (CFLP) said, while analysts warned demand may ease in the coming summer months when construction activity slows.
China, which makes about half of the world's steel, produced a record volume of the building material in April at a time when Beijing is campaigning to tackle surplus supply.
The Purchasing Managers' Index (PMI) for the steel sector rose to 54.8 in May from 49.1 in the previous month, climbing above the 50-point mark that separates growth from contraction, according to data from CFLP.
The new orders index jumped 13.6 percentage points to 60.5, the highest level since May 2016, data showed.
"Demand from traders and downstream consumers rose as prices rebounded. Sales are good while steel firms are seeing more orders," CFLP said. Shipbuilding surged 72 percent in January-April, it said, while sales of excavators and bulldozers also grew sharply in April.
"Steel demand fundamentals continue to improve. Currently, extremely low domestic steel stocks mean prices will continue to rally. But risk in the market is growing given that prices and margins for steel mills are at a historically high level," it added.
Stocks of construction steel product rebar held by Chinese traders have more than halved from mid-February to 3.93 million tonnes as of May 26, according to SteelHome consultancy. SH-TOT-RBARINV
China's fixed-asset investment grew 8.9 percent in January-April as the government increased infrastructure spending to spur economic growth.
"There was an improvement in demand but we don't think it will be sustainable because we're approaching summer when construction usually slows down," said CRU analyst Richard Lu.
There is also weak appetite for Chinese steel products overseas, particularly in Southeast Asia, said Lu. About a third of China's steel exports flow into that region.
"In March and April, a lot of Southeast Asian importers booked rebar and billet orders from Russia, Ukraine, Iran and Turkey," he said.
"So it seems their inventories are full now and monsoon season is coming, so their demand might not be as strong in June through August."
The steel export index slipped 0.2 percentage points to 44.8, falling below the 50-threshold for the sixth consecutive month.
"Steel mills have difficulty taking new export orders. We expect steel exports to continue to drop in following months," CFLP said, citing higher domestic steel prices and trade tensions between China and foreign markets.
China's steel exports dropped 25.8 percent to 27.2 million tonnes in January-April.