As China's economy lost steam over the past year, so did demand for the materials to construct its buildings and highways. Already before then, the joke in China's steel market has been that profit from producing a ton of metal was insufficient to buy a kilogram of pork. That hasn't changed. Data from the China Iron and Steel Association showed that in the first half, average profit of selling one ton of steel was only 0.43 yuan (7 U.S. cents). A kilogram of China's favorite meat costs about 30 yuan.
After a miserable first half of the year, Chinese steel prices have inched ahead since late June. Sales of cement and construction machinery are also up, as local governments pledge to ratchet up investment.
The trend comes amid other signs the slowdown in the Chinese economy has bottomed out. Industrial output accelerated to 10.4% year-over-year growth in August, up from 9.7% in July, according to government data published Tuesday.
That increase in economic activity has buoyed confidence in China's immediate growth prospects. But it has raised concerns of an economy tilted further toward reliance on capital spending. Total social financing, a broad measure of new credit in the economy, measured 1.6 trillion yuan ($261 billion), nearly double July's 808 billion yuan.
Such investment-fueled growth has helped Beijing ward off slowdowns before, most notably in the wake of the recession that flattened industrial economy five years ago. With concerns rising about bad loans and high debts, Chinese leaders have said the strategy risks compounding old problems like industrial overcapacity and hinder efforts to raise consumer spending as a more sustainable driver of growth.
Across the construction sector, there were signs of a turnaround in sales and prices.
Cement prices have rebounded since June. July and August sales were strong, in defiance of the normal lull in summer, when boiling temperatures suspend construction. That reflected frequent signals from the government on stabilizing growth and accelerating railway construction, said the China Cement Association.
The construction-equipment industry also showed signs of escaping a two-year slump, with Chinese excavator sales for August up 12.9% on year, up from 9% growth in July and a slight decline of 0.8% in June, Sun Hung Kai Financial analyst Vik Chopra said in a note.
"We think the real recovery of the machinery industry is better than what data has showed," UBS industry analyst Fu Weiqi said. "Sales of lower-priced equipment and heavy trucks were strong and finished-products inventory is declining." Mr. Fu expects machinery-equipment sales will gradually accelerate in the second half of the year.
Wang Lei, an official with Shandong-based steel firm Laigang Group sees among positives for the steel sector the government's "microstimulus" efforts, a softer stance on property development after a series of moves to rein in housing prices in China last year as well as accelerating investment in railway and infrastructure. "In general, steel prices are expected to maintain the upward trend in the coming months," he said.
Local governments' plans to spend on infrastructure should give the rebound in demand some legs. Several provincial governments held meetings in July and August, emphasizing the importance of strengthening investment.
Many local governments that hadn't been able to expand investments amid the economic slowdown are now restarting ambitious plans.
"Local government income from land sales surged in the first half, and China's new-yuan-loans boom in the first half went to local governments mostly, so local governments now are more able to support investments," UBS economist Wang Tao said.
"The first half has passed but we haven't completed half of the full-year target [for investment]," said Xu Yun, deputy director of the Yunnan provincial Industry and Information Technology Commission at a project-promotion meeting in August. He expected more emphasis on big projects in the second half.
In Sichuan, the provincial government said in a statement on its website in August, "We should launch a series of projects as soon as possible including renovation of run-down buildings, the upgrading of older cities and new-city construction."
Despite the boost to growth from such spending, a return to state investment as the driver of growth adds to concerns about China's burgeoning imbalances, where capital spending has been seen as too high and household spending too low. "Déjà vu—another infrastructure- and property-investment-led rebound," said Barclays China economist Jian Chang.
As for a rebound in steel profits, market participants said overcapacity and debt would continue to weigh on many firms' balance sheets.
"Even though the situation was tough for steelmakers, most of them were reluctant to cut production due to concerns over losing market share or credit suspension by banks," said an official with China's largest private steelmaker Shagang Group. "So you see, even as the market is getting better, the profit margin is still pathetic."
—Yajun Zhang
