Have China's steel prices bottomed out?

• Steel prices rise as mills incur losses
  
  
• Production cuts, inventory depletion may support higher prices
  
  
• Expected demand upturn in H2 to help mills shore up margins
  
  

Morning Brief: On July 18, prices in the Chinese domestic steel market halted their fall from the peak levels seen earlier in Q2. Prices of many steel items rose. According to one industry data, the average spot prices of rebar rose to touch RMB 3,936/tonne (t) ($583/t). The average prices of hot rolled coils (HRCs) were at RMB 3,826/t ($487/t), up RMB 90/t ($13/t) d-o-d.

Data maintained with SteelMint shows China's spot domestic HRC (Tangshan) prices rose to RMB 3,950/t on 18 July, up almost 4% from the previous close. On 19 July, Tangshan rebar was up 0.77% d-o-d to RMB 3,910/t.

In fact, prices on both the spot and futures market rose. On 18 July, not only did prices in the spot market rise, but steel futures too. The data shows that as of close at 15:00 on 20 July, the benchmark SHFE futures contract of rebar closed at RMB 3,805/t ($563/t), up 2.7%. The SHFE HRC contract settled at RMB 3,790/t ($561/t), an increase of 3% against last week's close. The benchmark DCE coking coal contract closed at RMB 1,954/t ($289/t). The DCE iron ore contract closed at RMB 659/t ($98/t).

It may be mentioned, Tangshan prices had dropped off earlier in the year. But they had started climbing back to touch a peak of RMB 5,120/t ($759/t) for rebar on 5 May and RMB 5,490/t ($813/t) for HRCs on 6 April, the highest so far this year.

Factors that will support the uptrend

• Steel production declines: Data shows that on 15 July, the blast furnace operating rate of major steel mills in China was at 77.5%, down 1.3 percentage points w-o-w and 3.5% lower y-o-y. In fact, the BF operating rate has dropped for five consecutive weeks, and steel production continues to decline. "The production cuts at mills attracted much attention this week, and many have plans to further reduce production. Once this is implemented, the continuous tightening of supply may support the upward price movement," said a source.
  
  

• Inventory pressure eases: At the same time, steel inventories are also declining amid the production cuts and may support prices. As of 15 July, the social inventory of steel in 29 key cities was at 13.374 million tonnes (mnt), a decrease of 274,000 t w-o-w. There have been "four consecutive declines", with a cumulative decrease of 1.134 mnt.
  
  
• Raw material costs may help prices to sustain: After the third round of reduction in coke prices, manufacturers ushered in the fourth round of reduction of RMB 200/t ($30/t). On 19 July, some steel mills in Hebei, Shandong, Shanxi and other regions planned to jointly reduce the purchase price of coke by RMB 200/t. But, market participants believe that although the price of coke has been raised and lowered many times, the current price is still the highest level in the past ten years. In addition, although the price of iron ore has declined, it is still relatively high. Under the cost push, steel mills are making losses. Therefore, the high production costs will support steel prices.
  
  

Subdued demand trend a red flag

However, the only red flag is there is no motivation to procure by end-users.

The current subdued demand trend continues. The industry is still in the traditional off-season amid high temperatures and rains. Mills have suffered serious losses and are not motivated to start production. The operating rate has declined.

"Under such circumstances, prices are currently continuing to rise without sufficient motivation, and the short-term is still uncertain," said a source.

Industry voices concern

In the face of the current market scenario, many steel makers have recently voiced concern.

Shen Bin, Chairman of Shagang, said at a recent conference that the entire industry is currently experiencing large losses, which will continue to increase, and the market situation is extremely severe.

He said things always move forward in twists and turns, and there are peaks and valleys. Every trough period is an opportunity for enterprises to test their internal strength, consolidate, and prepare for development. "In the face of challenges, we should learn, analyze and make good use of policies, and implement a series of targeted measures to enhance competitiveness," he added.

Liu Jianrong, Secretary of the Party Committee and Chairman of Xingang Group, said a new round of brutal market competition has arrived. Mills are suffering losses. In response to this round of fierce market competition, the company's business strategy and cost control in the second half of the year must be significantly adjusted, he informed.

Outlook

Looking at the medium-to-long term, it is likely that Chinese steel price may have bottomed out. Mills have been operating at losses and the present margins are not sustainable in the face of the raw material cost push.

There are expectations of a demand upturn in the second half (H2) from an infrastructure push and a rise in indirect steel exports. Both factors will likely keep prices supported in H2.