China's imports of iron ore appear headed for their strongest month this year in June, but the risks of a slowdown in the second half of 2018 are mounting.
Seaborne imports in June of the steel-making ingredient were 88.9 million tonnes by the 27th of the month, according to vessel-tracking and port data compiled by Thomson Reuters Supply Chain and Commodity Forecasts.
With three days of unloading left, it's likely that June imports will exceed the 91.1 million tonnes captured by the shipping data in May, and possibly exceed the official customs number of 94.1 million reported for last month.
The vessel-tracking and customs data don't align exactly on a month-by-month basis because of small differences in when cargoes are assessed as having been unloaded. However, over the longer term the two measures track each other closely.
The key point is that China's imports of iron ore have remained relatively strong, even as rhetoric and actions in the trade dispute with the administration of U.S. President Donald Trump have escalated.
While the trajectory of the trade dispute is uncertain, it's not the only issue hanging over the resilience of China's steel sector, which accounts for about half of global production.
So far this year, the steel story in China has been one of strength, as strong margins have encouraged higher production.
Steel output was 81.13 million tonnes in May, a monthly record, and up 5.8 percent from the previous month, according to data from the National Bureau of Statistics.
Production in the first five months of the year was 369.86 million tonnes, up 5.4 percent from the same period in 2017.
The rise in steel output came even as China enforced anti-pollution measures in some areas, but allowed other regions to boost capacity utilization.
The rising output has been spurred by solid profits, with estimates that steel mills can currently make around 900 yuan ($136) a tonne.
The main risk for the steel sector is that the strong profitability results in a glut of output, which drags down prices and thus demand for imported iron ore.
There is already some evidence of prices starting to ease, with the benchmark Shanghai rebar contract slipping recently.
It closed at 3,688 yuan a tonne on Wednesday, down 5 percent from its close of 3,882 yuan on June 15, which was a 10-month high.
Gauging where China's steel markets are headed in coming months is tricky, given that demand tends to be stronger in the second half of the year, but the risks appear skewed to the downside.
The China Iron and Steel Association has chosen to tread a neutral path, with Qu Xiuli, vice chairman of the industry group, saying that it expects steady demand in the second half, albeit with a risk of oversupply.
Additional investment in advanced steel-making capacity and the resumption of low-end rebar production, some of it illegal, were adding to the risk of a glut in the market, Qu said.
The main risk is that the trade tensions between Beijing and Washington move from the arena of political theater to having actual economic impacts.
While Washington and Beijing have engaged in tit-for-tat tariffs, there is still a possibility of compromise, especially if declining equity markets start to threaten wider economic consequences.
If Chinese exports of machinery and other steel-intensive manufactured goods start to decline, it will knock both sentiment and demand for steel and iron ore.
The Chinese property sector appears to be in good health currently, with rising sales and construction starts, but there is the risk that the authorities may act to cool investment, especially if prices continue to rise.
Overall, there are few reasons to believe that China's steel sector will continue to grow as strongly in the second half of the year as it has in the first.
But equally, some of the current risks will have to turn into reality before there would be a serious chance of a downturn.