China's steel prices to see more growth in Aug - Mysteel

Support from China's macro-economic environment and steel-market fundamentals may lead Chinese steel prices to record further gains in August, albeit with some fluctuations, Wang Jianhua, Mysteel's chief analyst, shared in his latest monthly outlook report.

"There's a growing market consensus (that prices will move northwards) and confidence is growing, but on the other hand, buyers are increasingly worried about how high prices might rise too," he observed.

At the macro policy level, Beijing's goal of stable economic growth will be the "anchor" for growth in steel prices, Wang maintained.

Due to the fast pace of growth recorded in H2 last year, China is facing greater pressure to maintain on-year economic growth during H2 this year, and that's one reason why the central government is introducing more supportive policies to stabilize the economy and keep growth on track, he noted.

On July 14, China's central bank announced it was lowering the reserve requirement ratio of financial institutions by 0.5 percentage point, an announcement which surprised market watchers as China's on-year GDP growth already stood high at 7.9% in Q2 and 12.7% for H1, according to Wang.

"Even though the reserve ratio cut was issued mainly to offset liquidity losses caused by the expiration of Medium-term Lending Facility and to ensure there's cash in the economy after domestic enterprises meet their tax obligations, it will still help to maintain stable liquidity and ease the financial constraints of the real economy," Wang stated.

The central government may "leave room" for other policies to be introduced to further release liquidity, given the downward pressure on China's economy and remaining uncertainties over the Sino-US relationship, Wang said.

On the other hand, as of June, the release of new government bonds for special purposes was only Yuan 1.7 trillion ($263.3 billion), or only 27% of the annual allocation. In previous years, the proportion normally reached around 60% by H1, Wang noted.

"With only a quarter of the funds issued, we can see how much and how fast such bonds will be issued later," Wang stated. Around 25% will be used in infrastructure construction projects, which will improve the financial conditions of the building contractors involved, he said.

Mysteel's quick surveys showed that in June, some 4,858 construction projects commenced across China with a total investment of Yuan 3.5 trillion, which was up 48% on month or 45% on year. For H1 in total, investment in new projects was up 142% on year, providing a good basis for steel demand in H2, according to him.

Regarding the domestic steel market this month, Wang indicated that fundamentals will be the "propeller" of steel price increases.

On the supply-side, steel supply will fall significantly both on-month or on-year in August, given Beijing's decision to curb crude steel output, Wang projected. He noted that at least 14 provinces or cities nationwide had held meetings about cutting crude steel output, requiring that output will not be higher than last year's.

Based on an on-year increase of 59.5 million tonnes in crude steel output in H1, in this half of the year, daily average crude steel output needs to be controlled within 2.7 million tonnes, or lower by 404,100 tonnes/day from the level in June, he calculated.

Meanwhile, demand will improve from July. Domestically speaking, August will see a revival of demand after the floods in many parts of China in late July had impacted steel deliveries and steel usage.

Regarding export demand, even though China has decided to cancel export tax rebates on the remaining 23 steel products effective August 1, steel exports will not be affected much, as Chinese steel products are still cheaper than those of overseas competitors, according to Wang.

So, he believed that August will see an acceleration of de-stocking of domestic steel products.

Mysteel's survey showed that as of July 29, total inventories of the five major products comprising rebar, wire rod, hot-rolled coil, cold-rolled coil and medium plate held by the surveyed traders in 132 cities climbed to 23.5 million tonnes - making for the seventh straight weekly increase or up 3.1% on month or 1.9% on year.

Stocks of the five products at mills, on the other hand, declined for four consecutive weeks to reach 6.1 million tonnes as of July 28, down 9.3% on month or 8.3% on year, according to Mysteel's survey.

Written by Olivia Zhang, zhangwd@mysteel.com

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