China: Steel prices show uptick. Will trend sustain in short term?

• Realty policy easing, liquidity injection boost sentiments
  
  
• Exports fell in Aug amid sliding Chinese currency
  
  
• Prices may further rise amid sustained policy support
  
  

Morning Brief: On the last trading day before the Mid-Autumn festival holidays began in China from 10 September, steel and its raw material prices rose, recording the best level since September began. The benchmark SHFE January 2023 contract of rebar closed at RMB 3,791/tonne, up 76 points while that of hot rolled coils (HRC) closed at RMB 3,838/t, up 44 points. The main contract of DCE coking coal closed at RMB 1,903/t, up 47.5 points and coke closed at RMB 2,548.5/t, up 58 points while the contract for DCE iron ore closed at RMB 720.5/t, up 26 points.

On 9 September, in terms of finished products, the average spot price of steel rebar touched RMB 4,080/t, up RMB 16/t d-o-d. The average prices of HRCs were at RMB 3,981/t, edging up by RMB 7/t d-o-d.

The market volume increased significantly in the week ending 10 September. Although steel production continued to increase m-o-m, the rate of increase has slowed. The social inventory is still low and the pressure on production to replenish that inventory is temporarily not high.

Why did steel prices rebound?
This week, steel prices overall slightly rebounded from last week on account of several factors.

1. Easing in realty policies: There was further easing in real estate policies. For instance, there was further liberalizing of the policies on guaranteeing delivery of buildings, real estate purchase restrictions and promoting of construction projects. This acted as a market confidence booster on the steel market.

2. Increased funds flow: Some macro-economic boosters were also initiated. First, M2 money supply in August rose 12% y-o-y, and 0.2% m-o-m. The volume of social financing increased by RMB 2.43 trillion in August, a sharp increase from the previous RMB 756.1 billion. This meant increased funds flow and which is crucial for stabilizing the overall economy and further instilled confidence in the steel market.

However, although the medium and long-term loans of enterprises inched up, the medium and long-term loans of individuals still declined, reflecting that real estate consumption demand is still sluggish, and this specific impact on the steel market needs to be observed in the future days.

3. Downstream demand rides cheaper raw materials: The reduction in raw material prices so far was conducive to improving demand. From a domestic macro perspective, the y-o-y growth rates of CPI and PPI both declined in August, making more room for subsequent monetary and fiscal policies. However, the growth rate of CPI exceeded that of PPI in August for the first time since 2021. Prices of industrial raw materials fell, further easing the pressure on downstream costs. Driven by the peak consumption season, the profitability of the mid-stream and downstream industries can be expected to improve. At present, industries like automobiles and home appliances have introduced measures to promote consumption. As a result, domestic steel consumption is also expected to rise.

Exports fall a bother?
However, the fall in exports data indicates a drop in overseas demand and could this impact domestic prices? Exports dropped 7% m-o-m in August to 6.2 mnt over July. Total steel exports in July, at 6.7 mnt, dropped 12% m-o-m against 7.6 mnt in June. In value terms, exports rose 7% y-o-y in August, significantly lower than July's 18%.

Exports to ASEAN are still as high as 25% y-o-y. The sharp drop in exports to the US and Europe reflects the lack of appetite for external demand, when the Chinese currency continues to depreciate against the US dollar, which is conducive to stimulating exports. With the economic downturn in foreign countries, the impact of declining overseas consumption on exports needs to be paid attention to.

Meanwhile, as per sources, China exported 100,000 tonnes of flat items to Korea recently, after the fire at POSCO's plant. Chinese mills also increased export prices by $10-15/t. However, with the European Union energy crisis escalating, this geography could start sourcing longs and semis from South East Asia. Then Chinese domestic demand will decide if export prices can sustain.

Outlook
Domestic policies to stabilize growth will continue to be introduced. There is room for policies to plug fiscal gaps. Infrastructure support may still be the main theme in the second half of the year.

Due to policy restrictions in the second half of 2022, production is expected to stabilize. After the Mid-Autumn Festival, the steel industry will need to focus on demand improvement.

Steel prices are expected to move up in the short term with rebar expected to be at around RMB 3,700-3,850/t, and HRCs, at RMB 3,730-3,900/t.