- Finished steel demand drops m-o-m in May
- Construction and realty sectors sluggish
- Q3 may show demand upturn but prices may be under pressure
Morning Brief: China’s demand for construction had shown an uptrend from late May, driven by infrastructure investment. However, this week, construction steel market transactions have shrunk again, leading to inventory accumulation. At present, the inventory of construction steel has reached the highest level ever and the ex-factory and dealer level prices are frequently getting inverted.
Data reveals that the “social” inventory (pertaining to traders, user-segment etc) of construction steel across the country has changed from falling to rising this week, reaching 14.31 mnt this weekend, 1.76 mnt higher compared to the same period last year, and also the highest level ever.
Traditionally, steel inventory reaches its peak level in March. After that, it drops by nearly half in early June. However, the decline this year is only 12%.
Why has construction steel inventory piled up?
But why did construction steel inventory increase instead of fall, especially since May saw a number of infrastructure projects being launched?
According to industry analysts, this was mainly due to the sluggish demand for steel in the real estate industry.
Industry insiders said that although a series of policies to stabilize real estate was introduced, the sector is still sluggish. Since real estate is the most important downstream steel industry, its slowdown has dragged down the demand for construction steel.
Measures to boost realty investment did increase steel demand and, as a result, in end-May, both rebar prices and volumes rebounded. But seasonal factors have blunted the effect of the measures.
Consequently, average daily trade volume of rebar was only about 150,000 tonnes this week, lower than the previous week. In the face of sales pressure, many traders chose to sell at even lower than ex-factory prices.
In other words, the downstream price cut failed to force the upstream to follow suit, mainly because prices of upstream raw materials are high, and with mills squeezed by costs, it is difficult to reduce prices. Blast furnace-route steel prices are now close to the production cost line, and the electric process is definitely on the verge of incurring losses. But if mills raise prices there could be a serious supply-demand imbalance.
Crude steel, finished output dip in May y-o-y
Crude steel output: As a result of the subdued downstream demand, China’s crude steel output in May 2022 showed a y-o-y dip of 3.5% to 96.61 million tonnes (mnt). The national average daily crude steel output in May was at 3.12 mnt, showing a negligible m-o-m rise of 0.7%. Output over January-May, 2022 touched 435 mnt, a y-o-y decrease of 8.7%.
Steel: Consequently, finished steel output in May 2022 also dropped y-o-y by 2.3% to 122.61 mnt. The average daily finished steel output in May was 3.10 mnt, a m-o-m increase of 3.3% while in January-May it touched 549 mnt, a y-o-y decrease of 5.1%.
Pig iron: In May, China’s pig iron output inched up 2% to 80.50 mnt, a y-o-y increase of 2% while the average daily pig iron output in May was 2.60 mnt, up m-o-m by 1.4%. In January-May, output of the material was 361 mnt, a y-o-y drop of 5.9%.
Outlook
This year is being regarded as the “big year” for infrastructure construction. Judging from the investment data of various projects such as transportation, water conservancy, new infrastructure, and new urbanization, infrastructure investment is expected to increase substantially. Industry insiders believe that the steel market is likely to pick up in the third quarter.
Thanks to the measures to stabilize growth and overall consumption revival post-Covid surge, China’s economic growth rate will gradually increase in the second half of the year, and it may show a V-shaped recovery although steel price may not be able to rise simultaneously because supply is still strong.
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