China's steel sector purchasing managers' index (PMI) decreased by 1.6 points from May to 49.3 in June, reflecting slow recovery in the steel industry, according to the China steel logistics professionals committee (CSLPC).

Sub-indexes showed that steel production increased but steel demand softened in June, leading to higher steel inventories at mills. Prices for raw materials kept rising while mill purchases slowed on the expectation of lower prices. Steel demand is likely to weaken in July but strengthen later, while steel production would continue to rise on the month but feedstock prices may fall in July, the CSLPC forecasted.

The Argus 62pc Fe index has averaged at $102.58/dry metric tonne (dmt) each month to date, down from an average of $92.29/dmt in May. The month-to-date average of Argus' domestic China rebar price stood at 3,594.76 yuan/dmt, up 2.1pc from the May average.

The steel PMI's sub-index for new domestic orders dropped by 6.5 points to 46.4 on weak downstream demand from heavy rainfall in southern China, including floods in some areas since mid-June. The sub-index had been rising for three consecutive months prior to June. The export orders index was at 31.9, down by 0.7 point from May, and below 40 for a fourth consecutive month because of weakening overseas demand as the spread of Covid-19 accelerated.

The steel production sub-index rose by 1.1 points from a month earlier to 57.5, a fourth straight month of gains. China iron and steel association data showed that steel output at its key member mills averaged 2.1257mn t/d in June, up by 2.89pc on the month and higher by 3.05pc from a year earlier.

Finished product inventories jumped quickly at mills as steel demand decreased but steel production rose, with delivery of products delayed in the rainy season. The inventory sub-index gained 15.1 points to 44.3 in June.

Higher prices of raw material in June resulted from stronger demand from mills and tighter supply for imported iron ore with shipments affected by the global spread of Covid-19.

The higher prices are pressuring margins across steelmakers, CSLPC said. Prices for imported iron ore are likely to trend down in the second half of this year with supply expected to improve, it forecasted. Brazilian supply remains uncertain given the rapid spread of Covid-19. Steel demand would continue to increase in the second half of this year, and steel production is also likely to extend gains. This could increase oversupply under restocking pressure. There is limited room for gains in steel price, CSLPC forecasted.

China's manufacturing PMI rose to 50.9 in June from 50.6 in May, according to the national bureau of statistics. This was the fourth month of expansion in factory activity after it cratered to 35.7 in February.