China's steel market tussle to intensify in July

Chinese steel prices will continue to struggle against downward pressure from the country's flagging steel fundamentals this month, though market expectations that the central government will soon introduce new economic stimulus measures may provide some upward momentum, Mysteel's chief analyst Wang Jianhua predicts in his latest monthly outlook.

Dull demand from steel end-users last month kept dragging domestic steel prices lower, with Mysteel's assessment of the national composite steel price losing 4.1% on month to reach yuan 3,840.46/tonne ($528.2/t) including the 13% VAT as of 30 June, hovering around a four-year low.

Entering July, steel consumption among end-users have barely shown any recovery, even though the torrential rains that had frequently disrupted domestic industrial production in June were expected to stop, according to Wang.

Among domestic industrial enterprises, the level of activity overall in both operation rates and raw material replenishment this month may be constrained by the narrow profit margins and tight financial liquidity, Wang warned.

China's M1 volume (including currency in circulation and demand deposits) had recorded its largest ever on-year drop in May, falling by 4.2% from the same month last year, according to the statistical results released last month by the People's Bank of China, the country's central bank.

Moreover, the accounts receivable of sizable enterprises in China totalled yuan 24.2 trillion by the end of May, growing 8% on year, and their average collection period for the accounts also extended by 3.4 days on year to 66.8 days, National Statistics Bureau (NBS) data showed.

"This means domestic companies may not have enough funds to proceed or expand their projects in July, and steel demand will decline accordingly," Wang explained.

Under such circumstances, the fact that domestic steel supply remains high will place a heavier burden on steel prices, he noted.

Mysteel's survey showed that daily hot metal production among the sampled 247 blast furnace (BF) steelmakers it monitors nationwide averaged 2.39 million tonnes (mnt)/day during last month, higher by 1.3% from May.

"It is difficult for end-users to consume that much steel, especially in the first half of this month," Wang cautioned.

Nevertheless, more domestic steelmakers are expected to reduce their production in July in response to the hefty losses they are suffering on steel sales, Wang pointed out. Mysteel estimates that hot metal production among the sampled 247 BF mills will retreat by 17,000 t/d from June to average 2.37 mnt/d this month.

On the other hand, market sentiment will likely improve later this month when Beijing hosts the Third Plenary Session of the 20th Communist Party of China Central Committee over 15-18 July, according to Wang.

"This meeting is expected to release some important development direction guidelines, which is definitely a positive sign," he said. "Though (the guidelines) may not have an immediate effect on the ferrous industry, the optimistic atmosphere of the financial markets may lend some support to domestic commodity prices and even trigger a rebound in steel prices," he suggested.

Besides, against the backdrop of the government's earnest efforts to promote carbon reduction in the country, more policies may be introduced in the second half of this year to restrict domestic crude steel production, Wang believed.

"The market will have more confidence regarding steel prices, so long as market players have positive expectations for Beijing's policies," he added.

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