How will Chinese steel market perform in August?

After the positive direction taken by the Chinese steel market in June and July, August looks a bit dampened.

Steel prices had risen for two consecutive months in June-July. The uptrend was fuelled by favourable policy stimuli.

However, the latest information coming in from China suggests that the entire steel market has yet again turned negative from early August with prices falling sharply in the first week. "Steel prices have fallen more sharply, and the drop in many places has reached RMB 60/t ($8/t)," said a source.

Factors impacting steel market in August

Global cues: One reason for the August negative outlook is propelled by global factors. Fitch unexpectedly downgraded the world's largest economy, the United States' credit rating from AAA to AA+, citing fiscal deterioration over the next three years and a growing government debt burden. This heightened the investment risk quotient and led market players to book profits and exit in haste, tanking markets globally, and forced a correction in ferrous metal prices too.

Demand not commensurate with supply: When steel prices rose in the last two months, the uptrend was not accompanied by a corresponding rise in demand. The market fell back on policy stimuli to do the trick but floods and rainfall in northern China played spoilsport.

Due to the impact of typhoons, and heavy rains, the market has been characterised by weak macro demand. As a result, the rebar market under-performed. On August 2, around 240 mainstream traders across the country sold 115,800 tonnes of construction steel - a decrease of 19% m-o-m. The national construction steel inventory increased over 3% m-o-m this week, hitting an 8-week high while hot rolled coil inventories reached a new high since April.

In fact, inventories of five major steel products increased by around 330,000 t.

"The cumulative increase in inventory and the decline in apparent demand have severely hit market sentiment, and a negative feedback trend cannot be ruled out,"a source said.

Supply side highs: The crude steel production curbs have been implemented recently, but the strength and pace of the control are still in doubt. Tangshan's restrictions on production partly ended in July, and blast furnaces have resumed production. Around 16 are slated to resume production in August, and 6 more are scheduled to be on maintenance. Considering that the flat output control policy is expected to gradually strengthen, it is estimated that the hot iron output in August will be 2.37-2.38 mnt per day. A source feels the oversupply pressure is mounting and the industry is still in the off-season period.

Fluctuating raw material prices offer little support: Raw material prices have been fluctuating of late and offering little support in the process. Among them, recently, coking coal and coke fell by more than 5% and 6% respectively, while iron ore fell by nearly 3%.

Around a week back, coke prices in Tangshan were at RMB 1,900/t ($263/t) - RMB 750/t ($104/t) or 28% lower than RMB 2,650/t ($369/t) seen at the beginning of the year. Ferrous scrap in Tangshan was at RMB 2,600/t ($362/t), a drop of RMB 120/t ($17/t) or 4.4% from the beginning of the year (RMB 2,720/t or $379/t), but a rise of RMB 100/t ($14/t) or 5.6%, from the lowest point of RMB 1,800/t ($251/t) seen on 6 July. Iron ore fines prices in Tangshan were at RMB 1,085/t ($151/t), which was RMB 55/t ($7/t) higher than RMB 1,030/t ($143/t) seen at the beginning of the year, and an increase of 5.3% compared with the lowest point of RMB 915/t ($127/t) recorded on May 4.

In end-July, the benchmark Fe62% fines imported from Australia fell to $108/t CNF China from $115/t seen on 24 July.

Outlook mixed

A key NDRC official recently said, as the effects of various policies continue to emerge, the economy will maintain a stable and positive trend in the second half (H2) of the year on the basis of continued recovery in H1.

However, others feel, it will take time for the policies to act at a micro level.

One source said there is a high probability of prices rising steadily in August, because these are currently within the margin of safety. "There is no condition for a sharp drop, and the inventory is at a historically low level compared to the same period in recent years, and the cost support is relatively strong," the source reasoned.

Yet another trade segment official said the recent sharp rise in futures prices has overdrawn the room for the futures market rise in advance. "Therefore, in August, steel prices will continue to rise in the first half of the month. After reaching a high point, they will face a risk of falling back in late August. The overall market in the second half of the year may show a downward trend," the official concluded.