China's new rebar standards impact market sentiment

MySteel Global: The looming introduction of new rebar standards has impacted China's market for construction steel, jolting it out of its summer slumber, with steelmakers and traders rushing to sell off their existing rebar stockpiles before the new rules take effect. At a time when prices are already soft because of the seasonal slowdown in building activity, the scramble to empty warehouses and stock yards is causing rebar prices to plummet, Mysteel Global found.

Stricter standards weigh on the already sluggish market

The chaos began on June 25 when China's State Administration for Market Regulation approved two new mandatory national standards for hot-rolled plain and ribbed rebar, GB1499.1-2024 and GB1499.2-2024 under which rebars are required to meet stricter tolerances regarding production accuracy, fatigue performance, smelting processes and testing methods, as Mysteel Global has reported.

These new standards will take effect on September 25, leaving a buffer period of three months from the day of the announcement for domestic rebar producers and traders to clear their existing rebar inventories.

In China's spring and autumn seasons for peak steel consumption, clearing their inventories would be relatively straightforward for mills and traders but during summer, the challenge is daunting, especially this year when domestic steel consumption is still struggling amid high temperatures and heavy rains sweeping most regions.

Worse, traders in southern China are now bracing for the imminent arrival of not one but two powerful typhoons-Typhoon Prapiroon and Typhoon Gaemi-that are barrelling towards China's southern and eastern coastal provinces including Zhejiang, Fujian and Guangdong this week to deluge some areas already soaked during torrential rains in early June. Building activity and steel distribution are certain to be disrupted, dashing the traders' hopes of making quick sales during this month at least.

As of July 25, China's total inventories of rebar under Mysteel's regular survey among traders across 35 Chinese cities and 137 Chinese steel mills it tracks totalled 7.71 million tonnes, while the apparent consumption of rebar was assessed at 2.31 million tonnes, Mysteel's survey showed, meaning that both would need over three weeks to clear their stocks, even if in the meantime, the mills didn't make another tonne and the traders didn't buy another tonne.

Panic sentiment triggers sell-off, prices slump

Under these circumstances, little wonder that many rebar makers and traders have stepped up sell-off activities, offering lower prices and other incentives to reduce their stocks and avoid risks, Mysteel Global observed.

By July 25, China's national price of HRB400E 20mm diameter rebar under Mysteel's assessment had declined for eight straight working days to Yuan 3,422/tonne ($473.2/t) including the 13% VAT, refreshing a new low since late April 2017.

Similarly, on the Shanghai Futures Exchange (SHFE), the most-traded rebar contract for October delivery closed at Yuan 3,329/t on July 25 And at one point during the daytime trading session, hitting a new low since November 2022.

On July 23, some 30 Chinese steel trade associations lodged a petition with related government departments seeking an extension of the transition period before the new rebar standards take effect, Mysteel Global learned.

"In the past week, panic has spread among steel mills and traders due to concerns about circulation of rebars in the market," the petition said. Steel mills and traders are eager to digest their existing stocks of rebars, which led to a rapid drop prices across the country and causing the sellers severe losses as a result, it said.

Moreover, the plunge in rebar prices has dragged those of other steel products lower in tandem, bringing more severe losses to the entire steel industry, the petitioners added.

Besides, some steel producers in Southwest China's Yunnan province and East China's Shandong province jointly announced they will continue defending their steel prices for settlement till the end of this month, instead of following the reference prices of others such as the SHFE or other related institutions, Mysteel Global has learned.

A turning point?

While some market players have decided to aggressively discount their wares to clear their stocks, some steelmakers have decided to help reduce supply (thereby slowing the market rout) by undertaking unscheduled maintenance on their bar mills to ease supply and price pressure, Mysteel Global observed. By July 24, nine steel mills had announced plans to control their production and sales, according to Mysteel's tracking.

If steel mills take the initiative to reduce rebar supply, they might be able to sell the bars in an orderly manner after the stocks in warehouses around the country have been digested, a Shanghai-based market watcher observed. This is an effective strategy to deal with the current predicament, he suggested.

It is possible that, after this concentrated destocking, industry players will usher in a new construction-steel market after September, where both production and stock levels are relatively low, he added.

As of July 25, a total of 55 Chinese steel mills had issued notices to customers advising that their rebars would adhere to the new standards, with their respective implementation dates spanning from end-July to mid-August, according to Mysteel's survey.

History repeats itself

This is not the first time that central government authorities have toughened standards in an attempt to force China's steelmakers to improve the quality of their rebars.

Back in February 2018, China's General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) and the country's Standardization Administration announced new specifications that required mills to introduce alloying elements such as vanadium, titanium and manganese to their melts in order to improve qualities such as pressure resistance and tensile strength. At the same time, the common practice among makers of water quenching their bars, a process seen as encouraging corrosion and reducing weldability, was also banned, as Mysteel Global reported.

On that occasion, the new standard did not become effective until November 1 that year, giving traders and mills nine months in which to prepare, unlike the brief three months' warning industry participants have received this time.

"The implementation of this year's new rebar standard hasn't come at a very opportune time, compared with the introduction of the present standards in 2018 when the steel market enjoyed a longer transition time and healthier market fundamentals," a Beijing-based market watcher commented.

Nevertheless, the tightening of the regulations in 2018 also created two unforeseen problems for the rebar sellers. For the steelmakers, the requirement to add alloying elements increased their production costs-by as much as Yen 300/tonne, on one estimate-and mills complained that they could not recover through raising their ex-works prices. Six years ago, China's construction steel market was far healthier than it is now, and if the State Administration's new national standards lift their production costs, the steelmakers will meet tough opposition from buyers if they want to pass these on, Mysteel Global notes.

For traders, the 2018 change presented an additional obstacle for those still nursing stocks of old standard bars after November 1 as some building contractors refused to accept rebars with the old standard tags, even though the steelmaker's quality guarantee was attached. "Considering the resistance from some users, we will consider lowering the prices of the products of the old quality standards later," a trader had admitted to Mysteel Global at the time.

Note: This article has been written in accordance with an article exchange agreement between MySteel Global and BigMint.