China steel market may run out of steam without fresh stimulus

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Publish time: 14th October, 2013      Source: ChinaCCM
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China's crude steel overcapacity and bulging stocks could start to depress steel and iron ore prices in Asia if there are no fresh stimulus measures forthcoming from Beijing to help all that steel find a home.

Many of the infrastructure projects currently underway are the tail end of the massive stimulus program unleashed by the government in the wake of the 2008 global financial crisis. Much of this was planned work pulled forward in the project pipeline, and it is not clear what will replace this once the current momentum has died.

China's steel market participants are now looking to a central government gathering in Beijing in November for some guidance on direction and sentiment. While few are expecting any measures specific to the steel sector, the Third Plenary Session of the 18th CPC Central Committee may offer more details on the relatively new leadership's thinking on economic matters.

However, recent comments from Chinese Premier Li Keqiang at the World Economic Forum in Dalian would appear to indicate that major new stimulus measures are unlikely. Beijing is targeting a 7.5% GDP growth rate this year and seems content for the economy to grow around 7% in the coming years.

A stronger property market on easier credit has seen developers rush to buy up land in cities recently, which could potentially help support demand for construction steel.

House prices in China's 70 major cities rose by an average 7.5% in July from a year earlier, according to the National Bureau of Statistics. But the November meeting will be watched for signs that Beijing may rein in lending to prevent another housing bubble.

STEEL PRICES FALL AS STOCKS BUILD

Chinese domestic rebar and hot rolled coil prices fell around 4% and 6%, respectively, in September from August due to softening demand. After a profitable August, mills are barely covering their costs again.

Despite the shrinking margins and tighter credit conditions, the smaller producers are not reducing steel output. Crude steel production over September 11-20 rose 0.7% from the first 10 days of the month, averaging 2.14 million mt/day for an annualized 781 million mt/year, according to the China Iron & Steel Association.

That compares with 709 million mt China produced in 2012.

Strong production and softening spot demand have resulted in an overhang of steel inventory in China. Stocks held by traders in late September totaled around 15 million mt, up slightly from earlier in the month, though still a long way from levels of more than 20 million mt seen in the first quarter of this year.

A lack of trading activity in the first week of October due to the national holidays in China could see stocks rise further, but at this stage there are no signs that mills plan to cut any output.

SENTIMENT TURNS NEGATIVE

Not surprisingly, sentiment among Chinese steel mills has turned negative, with market participants expecting prices to decline over the coming months, according to Platts' monthly Steel Sentiment Survey for September.

The survey, which canvasses the views of around 70 major and mid-tier Chinese mills as well as traders, found that all mill participants anticipated that domestic flats prices will fall, while longs will remain steady over this month. Nearly all mill respondents expected their output to remain at current levels in October, and believed inventory levels would either remain stable or rise.

Export prices have been weak in September and mills and traders expect further declines in October. The key Southeast Asian markets have been quiet and competition from countries with devalued currencies, such as India, and also from Japanese steelmakers, has been intense.

Meanwhile, the HSBC and official Chinese Purchasing Managers' Indices both crept up by 1 percentage point in September from August to reach 50.2 and 51.1, respectively.

It was the strongest manufacturing number this year for the official PMI, compiled by the National Bureau of Statistics, which surveys larger and state-owned companies. The HSBC PMI typically picks up the views of smaller or privately owned businesses and has been tracking slightly below the official one since May.

Again, this could reflect the tougher credit environment for smaller Chinese companies. In the latest HSBC survey, manufacturers' purchases of inputs, including steel, increased modestly for the second month in a row, while stocks of materials fell again, albeit only slightly.