Steel demand in China is gradually picking up as its
economy continues to show signs of improving. However, steel prices may
fluctuate from late September till October till the impact of the booster
policies to revive the economy starts percolating down.
Reasons for the expected volatility in Chinese steel
1. US Fed rate hike?: Global
factors like tightening of the US Fed's monetary policy, have set off a
"wave of interest rate hikes" amongst most countries. Global
inflationary pressures have further intensified, and economic growth has slowed
down and is expected to remain so for quite some time. As a result, demand for
commodities such as steel will decline, it is being felt.
The US Fed is expected to announce its interest rate
hike policy and naturally all eyes are on the same. There is an 80% chance that
the US Fed will raise interest rates by 75 points. The markets may relax a bit
and futures prices may also rebound post-the Fed announcement. If the Federal
Reserve unexpectedly raises interest rates by 100 points, it will suppress
global commodity prices.
2. Infra investment may boost steel prices: Infrastructure investment is the biggest bright spot this
year, as per a report. which is good news for steel demand. This can perhaps be
attributed to the government's encouragement of infrastructure-led investment.
From October to November, the growth rate in infrastructure investment is
expected to reach an optimistic 11%, which will continue to drive the recovery
of steel demand.
Investment in fixed assets and the manufacturing
industry have been generally positive. From mid-to-late August, the growth rate
in investment in fixed production reached 5.8%. Impacted by Covid, fixed asset
investment fell to 5.5% in September, but the growth rate was relatively high.
From October to November, the national fixed asset investment growth rate is
expected to reach an optimistic 7%, which will induce considerable increase in
demand - a prospect that, in particular, is the core reason for the optimism
about domestic steel prices over the next few months. China's manufacturing
investment increased 10% in January-August, and in August, by 9.9%. In the
second half of this year, the growth rate in manufacturing investment may
continue to increase, reaching 11%, which will boost demand for products such
as sheets and strips.
3. Realty still a drag: Real
estate investment did not improve significantly in January-August, showing a
negative growth of 37% in newly started projects. This segment will continue to
deteriorate, or reach a negative growth of 40% and not improve significantly in
the short term. However, after the policy of "guaranteeing the handover of
buildings" was implemented, the number of completed projects gradually
increased, and the negative growth rate has significantly improved. The
increase in the number of completed projects will not help the demand for
rebar, but will drive the demand for decorative thin plates, steel pipes and
Real estate will continue to have a negative impact
on steel demand in the second half of this year and till the first half of next
year, especially rebar demand.
4. Production cut pressures: Steel production is under increasing pressure, but is
likely to rebound in the short term or y-o-y. Steel production fell by 5.7% in
the January-August period, or nearly 42 million tonnes (mnt), a very large
drop. From August to September, output has gradually increased. The latest data
released in August showed that the daily output was 2.7 mnt, and it is expected
to continue to increase from September to 2.8 mnt. In terms of total volume, it
is not very high and even if the daily output is restored to 2.8 mnt in
September, the output pressure will be relatively controllable.
In terms of production, two factors should be kept in
a) The decarbonisation related
environmental production cuts to be implemented in autumn and winter this year
in the surrounding areas of Beijing, Tianjin and Hebei, and
b) The crude steel production
cut policy applicable across the country.
Sustained production cuts may support a price uptick.
5. Inventory pressure eases: In terms of inventory, the pressure has gradually
decreased in recent months. Since late June, the social pool has declined for
12 consecutive weeks, and the inventory of building materials has been absorbed
in particular. The decline in inventories has two advantages, one is stable
market sentiment, and the other is increased liquidity. Once a more obvious
opportunity appears, traders will look for a price bottom.
It should be noted that due to the increase in
production and the impact of the epidemic, demand growth rate has slowed down
in stages, and the inventory increased in recent days. But, this is a
short-term mismatch between supply and demand, and the inventory is expected to