Chinese steel prices continue to downtrend in Sep'24; Short-term demand recovery looks modest

• Real estate, infra sectors still struggling
  
  
• Some restocking likely ahead of holidays
  
  
• Prices may not have bottomed out yet
  
  

Morning Brief: Chinese steel prices have continued to down-trend in September. The main rebar futures contract has steadily hit new lows this year, and spot prices have also fallen. In some regions, rebar fell below the RMB 3,000/t ($423/t) mark again.

Tanghshan hot rolled coil (HRC) and rebar prices have been declining since June 2024. Benchmark HRC dropped m-o-m in August to RMB 3,364/t ($474/t) compared to RMB 3,694/t ($520/t) in July. Till 12 September, prices averaged an even lower RMB 3,215/t ($453/t).

Similarly, benchmark rebar averaged RMB 3,204/t ($451/t) till 12 September. Overall, current rebar prices are lower compared to July's RMB 3,494/t ($492/t) and August's RMB 3,221/t ($454/t).

Factors pulling down prices in Sep'24

The sluggish buying trend has further exacerbated the pessimism in the market, but the deeper reasons still revolve around supply-demand mismatch.

The steel market has now entered the traditional peak demand season. Although the demand side is better compared to July and August, the overall improvement is limited and has not met market expectations. Naturally, the number of low-price sales has increased.

Real estate market still struggling: According to the data released recently, real estate investment is still in a downtrend. Actual steel procurement of more than 200 construction companies in August touched around 6 million tonnes (mnt), lower by another 1.2% from the previous month. These entities planned buying for September may rise 10% m-o-m to around 7 mnt. But construction steel demand this month may still stay low y-o-y, as users are cautious about building up stocks given the uncertainty of China's steel market in the short-to-medium term. In fact, construction steel sales in the physical market have not shown any significant improvement so far this month. For the first 10 days of September, the daily trading volume of rebar, wire rods and bar-in-coils among the 240-odd trading houses averaged 106,688 tonnes/day, still lower than the average of 110,898 t/d seen in August.

Infrastructure growth rate slows: Although infrastructure is growing, the rate has slowed. In particular, the 'Municipal Infrastructure Asset Management Measures' jointly issued by the Ministry of Finance and six other departments recently emphasised that it is strictly forbidden to raise hidden debts for municipal infrastructure assets when backed by nil or insufficient income. Also, increasing hidden debts will also not be allowed. This has created a certain negative impact on infrastructure investment, which is correspondingly depressing steel demand.

Manufacturing index drops m-o-m in Aug: In August, the manufacturing PMI dropped by 0.3 percentage point m-o-m, indicating that the country's economic well-being level dipped. The production and new order index were at 49.8% and 48.9% respectively, down 0.3 and 0.4 percentage points from the previous month, indicating that production and demand of manufacturing enterprises have slowed down to a certain extent, reinforcing the problem of inadequate consumption, which is further aggravating the negative sentiments.

Slide in raw material prices: Recently, raw material prices also fell sharply, hitting new lows this year, weakening the support to finished products. The benchmark iron ore contract fell by 10% this month, and the coke contract by nearly 11%. In terms of spot, as of 10 September, iron ore price at Rizhao Port fell by RMB 55/t ($8/t), a drop of over 7% m-o-m. Moreover, recently, the eighth round of price reductions in coke happened, with a drop of RMB 50-55/t ($7-8/t). Met coke, FOB Tianjin, has averaged $247.50/t in September against August's $260/t. Prices have fallen steadily since May.

Overcapacity a bane amid weak demand: The problem of steel over-capacity is getting exacerbated under the weight of weak demand. On 4 September, as per a survey, the blast furnace operating rate of major steel mills across the country was at 75%, an increase of 0.5 percentage point w-o-w. The resumption in production, although not large, can be attributed to a gradual recovery in the margins of blast furnace mills. EAF production, on the other hand, has remained stable amid difficulty in scrap collection.

Outlook

Prices did rebound slightly last week on expectations that construction steel end-users may return for restocking ahead of the Mid-Autumn Festival holidays over 15-17 September and the National Day holidays over 1-7 October. This may boost domestic steel demand to some extent, though m-o-m recovery will be limited as sentiments are still low and many feel steel prices have not yet bottomed out.

Plus, there are "trade war" fears as the US on 13 September locked in steep tariff hikes, including a 100% duty on EVs and 25% on steel amongst other sectors.

However, with the advent of a supportive autumn weather and further stimulus measures like rate cuts, there is also an expectation that the demand side may improve.