China: Steel prices show a declining trend

China's steel prices have started declining, since Aug'21. A strong indication is the rebar futures, which have fallen the most in this month, from RMB 5,700/tonne (t) to below RMB 5,400/t, while spot rebar prices have also fallen by more than RMB 100/t. The market has been bleak in August.

On August 17, the main rebar futures contract on the Shanghai Futures Exchange (SHFE) closed at RMB 5,345/t, down RMB 45/t, or 0.83%. In August, these fell RMB 392 /t, or more than 6.83% although spot rebar prices were relatively stable. According to latest reports, on 17 Aug'21, the average price of the 25mm grade 3 rebar in key cities was at RMB 5,258/t, a slight d-o-d drop of RMB 6/t. In August, the cumulative decline was RMB 153/t, or 2.83%.

This year, the crude steel output cuts have become one of the important factors affecting the trend in steel prices. China's average daily output of crude steel in Jul'21 hit a new low since Apr'20. As the production restrictions are beginning to manifest, steel prices have continued to fall.

Thanks to the production restrictions, crude steel output declined in Jul'21, but the output is still higher than that seen in the same period last year. Therefore, the current supply pressure on the market has not dropped significantly.

Demand weak

On the demand side, recent floods in many areas in China have caused repeated epidemics, resulting in transportation bottlenecks. Construction sites have been significantly affected, and the demand for steel continues to be impacted on the lower side.

As per data from the National Bureau of Statistics, the rate of fixed asset investment has weakened, and the two-year average growth rate has dropped for the first time. Infrastructure and real estate investments have both declined significantly. The growth rate of industrial production has also declined. There has been a decline in the manufacturing PMI index and the new export order index. The current demand for steel is insufficient for regaining growth momentum.

Inventory rising

The current inventory level at plants is still on the rise. According to statistics from the China Iron and Steel Association (CISA), the inventory of key steel producers in the first half (H1) of Aug'21 was 14.6221 million tonnes (mn t), a 6% increase of 0.884 mn t from the previous month. Compared to the beginning of the year, this is an increase of 30 mn t, up 26%, and up 5% y-o-y at by 632,100 t.

Although the retail stocks have been falling for the past two consecutive weeks, the decline is relatively small and slowing down. On 13 Aug'21, data from Lange Steel showed that the retail stocks across 29 key cities were at 13.285 mn t, a marginal 0.98% decrease of 131,000 t compared to last week and a cumulative 320,000 t or 2.35% drop in two weeks.

Frequent speculation over production cuts is leading to the fluctuations, but actual demand continues to be sluggish, and the weak supply and demand scenario is persisting.

Outlook

The market is affected by factors such as policies, pandemic, weather, etc, and demand continues to be low, which makes it difficult for the spot market to pick up in the near term. In the short term, it is expected that the steel market will continue to fluctuate. However, because of raw material costs, the decline in steel prices is expected to be relatively limited.

~Madhumita Mookerji