China March producer inflation cools for first time in seven months on steel glut fears

12 April 2017

China's producer price inflation cooled for the first time in seven months in March as iron ore and coal prices tumbled, pressured by fears that Chinese steel production is outweighing demand and threatening a glut of the metal later this year.

A renaissance in China's steel industry has been a major driver of the world's second-largest economy in recent quarters, helping to generate the strongest profit growth in years and adding to a reflationary pulse being felt across the global manufacturing sector.

But after cranking out as much metal as possible in recent months, Chinese steel mills are now starting to cut prices, threatening to snuff out a bull market that had pushed prices of some steel construction products to their highest since 2014.

China's producer price index (PPI) rose 7.6 percent in March from a year earlier, still at an elevated pace but in line with analysts' expectations and easing from a gain of 7.8 percent in February, which was a 9-year high, the National Bureau of Statistics said on Wednesday.

Economists polled by Reuters had forecast a softer reading as a torrid rally in China's commodity markets showed signs of correcting and on expectations that measures to cool the country's overheated housing market would eventually slow demand for steel and other building materials.

On a month-on-month basis, the PPI rose just 0.3 percent, the smallest increase since September 2016 and half the pace seen in February.

China's consumer price inflation edged up to 0.9 percent year-on-year, slightly softer than expected and compared with 0.8 percent in February.

Analysts polled by Reuters had predicted March consumer inflation would edge up to 1.0 percent, but remain well within the central bank's comfort zone.

Still-modest consumer inflation and moderating producer prices will give policymakers room to continue with a gradual pace of monetary policy tightening as they try to contain risks from years of debt-fueled stimulus without crimping economic growth.

Consumer inflation picked up in March as costs for health care services, housing, transportation and communication surged, suggesting stronger demand from an increasingly wealthy and rapidly aging population, and that stronger producer inflation in the past months may have started passing through to downstream consumers.

Food prices, the biggest component of CPI, fell by 4.4 percent in March after a 4.3 percent drop in February.China lowered gasoline and diesel retail prices late last month by most so far this year.

Similar to previous months, much of the year-on-year surge in producer inflation was largely driven by higher prices of raw materials for steelmaking products such as iron ore and coking coal.

Demand has been fueled by a housing boom and a government infrastructure spending spree, with Beijing's efforts to cut excess production in heavy industries giving an added boost to frenzied futures markets and imports of raw materials from big producers such as Australia's Rio Tinto  and BHP Billiton.