China: Steel futures leap on optimism from central bank

Steel futures prices in China jumped over Tuesday night and Wednesday after the country's central bank, the People's Bank of China (PBOC), signaled more measures to increase liquidity.

In a press conference on Tuesday, Liu Guoqiang, the PBOC's deputy governor, indicated that the central bank will utilize more monetary policies to ensure the stability of market liquidity and economic development.

Tuesday's statement came after the central bank on Monday had cut the interest rate on one-year medium-term lending facility (MLF) loans to financial institutions by 10 basis points to 2.85% from 2.95%, Mysteel Global notes. The seven-day reverse repo rate was lowered by the same margin to 2.1% from 2.2% previously.

Both the timing and degree of the reductions were beyond market expectations, but the PBOC declared that decisions regarding monetary policies need to be taken in advance, to "respond to market concerns in a timely manner".

Liu also indicated in the conference that "there is still room" for further cuts to the reserve ratio - the minimum amount of money that commercial banks must hold in liquid assets - to release more liquidity into the market. Yet the scope has already narrowed, Liu noted, after the PBOC's two cuts last year in July and December respectively by a total of one percentage point.

Tuesday's statement made by the central bank nonetheless gave a boost to Chinese steel market sentiment, market sources noted.

At one point on Wednesday, the most-traded May rebar futures contract on the Shanghai Futures Exchange touched Yuan 4,744/tonne ($747.1/t), the highest since October 25 last year, SHFE data show. The contract ended the afternoon session at Yuan 4,713/t, up 3.02% from the settlement price of Tuesday.

In the meantime, the most-traded May contract for hot-rolled coil (HRC) also posted a 2.88% increase on the same comparison to Yuan 4,815/t.

"Previously, market sentiment had been bearish, but with the positive signals from the central bank, the steel market is more confident about demand after the Chinese New Year holiday (over January 31-Febuaruy 6)," observed Zhuo Guiqiu, senior ferrous analyst with Jinrui futures.

"The money will mainly be funneled into the construction of new infrastructure and new energy projects, which will support steel demand," Zhuo said. "At the same time, it will help improve the situation of the property market too," he maintained.

China's property sector, the country's largest consumer of steel by far, suffered from serious financial constraints last year and witnessed a significant slowdown due to tightened controls, as Mysteel Global reported. But the situation has been improving since last September thanks to the moderate easing of credit.

"The worst period has passed, and the future still seems promising," Zhuo commented, expecting steel futures prices to strengthen at a high level at least during H1 this year.

Written by Olivia Zhang, zhangwd@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.