Have Chinese steel prices bottomed out? Q2 looks bullish

• Supply glut-led production cuts to support prices
  
  
• Booster shots see realty showing slight recovery
  
  
• Macro indicators improve, may support H1 prices
  
  

Morning Brief: China's steel prices, which had been showing a falling trend, may have bottomed out and can do a turnaround in the second quarter (Q2) of the current calendar. Data from China's National Bureau of Statistics, maintained by BigMint, reveal that both benchmarked HRC and rebar prices in Tangshan dropped 6% y-o-y in January-February 2024. Average HRC prices hovered at RMB 4,108/t ($568/t) in January-February, 2024 against RMB 4,353/t ($602/t) in the same two months in 2023. Rebar too dropped from RMB 4,108/t ($568/t) to RMB 3,881/t ($537/t) in this period. It may be noted prices had upped slightly in the third week of January this year but had backed down quickly early February onwards.

Factors that may support a price rebound in Q2

Mills to cut output to ease supply pressure: The biggest pressure on the steel market this year comes from the excess steel production. As per NBS data, January-February 2024 crude steel output was at 168 million tonnes (mnt), a y-o-y increase of 1.6%. This glut translated into supply pressure and pushed down prices. Resultantly, the profits of mills were squeezed while some incurred serious losses. Thus, many have opted to cut March production to reduce supply. The market buzz in China now is that if no major challenge emerges, then prices may have bottomed out and will see a rebound in Q2.

Macro parameters improve: The macro parameters have also shown some improvement in a spin-off effect of the stimulus measures, which will further support the price rebound. Although challenges facing the economy are still severe, sources say, the economic fundamentals continue to improve.

For instance, in the first two months of this year, the added value of industrial enterprises above a designated size increased 7% y-o-y, 0.2 percentage points faster than that in December 2023, and by 2.4% y-o-y compared to January-February 2023, with a growth rate of 4.6 percentage points. As a result, output of some steel-consuming sectors improved. Automobile production rose 4.4% y-o-y while metal cutting machine tools output increased 20%.

The national investment in fixed assets (excluding rural households) increased 4.2% y-o-y, 1.2 percentage points faster than in the previous year. Within this, infrastructure investment increased 6.3% y-o-y - the growth rate of 0.4 percentage points faster than that of the previous year. Manufacturing investment increased 9.4% y-o-y, where the growth rate was 2.9 percentage points faster than that of the previous year.

Real estate investment fall narrows: China's real estate investment fell 9% y-o-y over January-February, but it is 0.6 percentage points lesser than the drop of 9.6% in 2023, reflecting that the decline may be showing signs of bottoming out. Steel consumed by the real estate sector accounts for 20% of production.

Importantly, the government is working with a three-pronged strategy to release realty demand:

1) Continued easing of housing purchase restrictions: The deregulation started in tier 2 and 3 cities will be extended to tier-1 cities like Beijing and Shanghai.

2) Continued reduction in cost of home purchases: Down payments and interest rates for home purchases have dropped. But further lowering of rates is expected from the present 3.86%.

3) Fully meet financing needs of real estate enterprises: A recent State Council meeting stressed on spruced up real estate policies to ensure delivery of buildings, assure people's livelihood, and strengthen urban real estate financing mechanisms to effectively stimulate demand, and increase supply of high-quality housing.

Exports momentum may support prices: Steel exports over January-February touched almost 16 mnt, a y-o-y increase of 33%, as per data from the General Administration of Customs. In this period, exports of mechanical and electrical products in China touched RMB 2.22 trillion ($307.24 billion), a y-o-y increase of 12%, accounting for 59% of the total export value, within which the export value of automobiles rose 16% y-o-y. This trend reflects a good start to both direct and indirect exports. If this momentum continues, steel prices will receive a further boost.

Outlook

Provided there are no major challenges, and supported by improved macro indicators, China's steel prices are expected to show a rising trend in the rest of the first half (January-June) of 2024.