MYSTEEL: Opposite forces to keep China steel prices in check

Domestic steel prices seesawed last month, with Mysteel's assessment of the national composite steel price sliding to a four-month low of Yuan 3994.89/tonne ($556.2/t) by October 23 before rebounding to Yuan 4,062.12/t as of October 31, Yuan 6.08/t lower than on September 28.

"Looking ahead to the market this month, prices will continue to be pulled between expectations and reality and caught between the conflicting market perceptions of high production and low inventory," Wang believed.

On October 24, China's central government had announced that a batch of bonds worth Yuan 1 trillion would be issued during October-December to support infrastructure-related projects such as flood control and post-disaster reconstruction, as Mysteel Global reported.

"This will drive up demand for steel from the infrastructure sector and boost confidence in the steel market," Wang explained, noting that the "improved sentiment may support a rebound in steel prices some time this month."

However, the bond issuance's positive impact on steel demand is unlikely to reveal itself this month because the bond application and approval process usually takes around one month, Wang warned.

"Once market participants regain their calm, fundamentals will again become the dominant factor affecting steel prices," he said. Besides, persistently high production of hot metal has intensified market concerns about a potential surplus of domestic steel supply, according to him.

Mysteel's weekly survey showed that daily average production of hot metal among the 247 sampled blast furnace (BF) steelmakers nationwide over October 20-26 still hovered high at 2.43 million tonnes/day.

"Steelmakers are not willing to rein in production, even though at the end of October, more than 80% of these mills were struggling with heavy losses on their sales of finished steel," Wang remarked.

Meanwhile, China's Ministry of Ecology and Environment late last month published a draft of guidance on responses to weather conditions responsible for causing heavy pollution that required provincial governments to be more cautious about initiating air pollution alerts this year, Mysteel Global learned.

"This indicates that supply disruptions from government-mandated production cuts will be reduced in the coming months (when the air quality usually deteriorates as the cold weather in winter slows air convection)," Wang pointed out.

Under such circumstances, so long as Chinese steelmakers still have cash they will continue to pursue "extreme production efficiency" this month, Wang believed, which will prevent the country's steel output from showing any significant drop. Mysteel estimates that the daily production of hot metal among the sampled 247 BF steelmakers will average some 2.4 million t/d throughout November, lower by just 1.9% on month.

Nevertheless, with many provinces striving to achieve better economic performances, domestic steel demand should remain resilient this month, and "in some regions, the weather in November will still be favorable for contractors undertaking building work outdoors," according to Wang. This too should provide some support for steel prices.

"As a result, domestic inventories of finished steel are likely to continue decreasing this month, though the scope of any decline will be limited," he added.

By October 27, inventories of the five major carbon steel products held by 184 steelmakers and trading houses across the country totalled 14.8 million tonnes, lower by some 2.2% from the end of September, according to Mysteel's tracking.

Written by Anthea Shi, shihui@mysteel.com

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