MYSTEEL: Supply increases threaten China's steel prices in May

Following a dismal March, domestic steel prices rebounded in April, with Mysteel's assessment of the national composite steel price escalating by Yuan 121.16/t or 3.1% on month to reach Yuan 3,993.13/tonne ($550.8 /t) as of April 30.

Wang noted that while the price recovery in April had been expected – given improving market fundamentals – loosening supply conditions would exert pressure on Chinese steel prices this month.

By the end of April, average daily production of hot metal among the 247 blast furnace (BF) steel mills under Mysteel's regular tracking stood at 2.29 million tonnes/day, up by 74,100 t/d from March 29.

The country's steelmakers lifted their production during last month to enjoy the better profits stemming from strengthening prices of finished steel, Wang noted. For example, among the same sample of 247 steel mills quizzed by Mysteel on April 26, some 51% replied that they had made a profit during the previous month, up from 29% as of March 29 and making for an eight-month high.

With more mills turning profitable and boosting output, daily hot metal production from the BF mills is expected to climb further this month and average 2.32 million tonnes/day, according to Wang.

However, the enthusiasm for increased production may be tempered by rising input costs this month, with prices of raw materials such as iron ore, coking coal and metallurgical coke rebounding in line with steel prices and squeezing the profits of BF steelmakers in turn. If raw material prices top out in May, the decline in costs will make it harder for mills to defend their finished steel prices when negotiating with customers, Wang warned.

Despite the high output, steel inventories in May are likely to decline further, as a marginal recovery in end-user demand is anticipated, he predicted, pointing to hopes for modest growth in China's manufacturing sector, especially in the steel structure and home appliance industries. Mysteel estimates that daily consumption of steel materials in these two sectors during this month will likely rise by about 11% and 5% respectively from April, based on the users' scheduled output for this month.

As of April 26, total inventories of the five major carbon steel products held by the 184 steelmakers and traders in the 35 Chinese cities Mysteel tracks regularly had decreased for six straight weeks to land at 19.4 million tonnes, lower by a significant 4.01 million tonnes or 17.1% from the end of March.

Wang predicts that apparent steel consumption in May will rise by 3.5 million tonnes on month – May having one day more than April – and that steel inventories will decline by another 2 million tonnes during this month.

The continuous decline in inventories had bolstered market sentiment overall in April though sentiment indicators for various steel products weakened during April 19-26 compared with the previous week, suggesting that sentiment was weakening in the leadup to China's five-day Labour Day holiday beginning May 1, Mysteel Global notes.

For example, during April 19-26 Mysteel's China composite sentiment index for construction steel was assessed at 58.11, lower by a large 14.7% from the previous week. However, this represented a significant surge of 65.2% compared to the March 22-29 period.

Written by Adele Pan, panqinjie@mysteel.com

Edited by Russ McCulloch, russ.mcculloch@mysteel.com