Chinese domestic steel prices have fallen as much as RMB 200-300 /MT, especially in futures rebar price by the end of August 18, however the Chinese steel market on the whole has not changed much in terms of sound fundamentals.
The decision-making body made no changes in the policy to stabilize investment, domestic demand, and the economy. Accelerating local government bond issuance can be considered as an example. The cumulative issuance of local government bonds has approached RMB 3 trillion. It is estimated that another nearly RMB 1 trillion of local government bonds will be issued in intensified frequency in September to support infrastructural investment.
Traditionally steel consumption during September and October months increases greatly. Due to increased demand, the months are called “Golden September and Silver October”.
This is also an important reason for the recent increase in market inventories. The latest reported data by the CFLP Steel Logistics Professional Committee shows that the current steel industry orders are good and the sales of finished products are relatively smooth. In August this year, the PMI (Purchasing Managers Index) of domestic steel industry was 53.4%, a slight decline on M-O-M basis but still above the critical point.
Under the high-profit stimulation, both crude steel and finished steel production have increased sharply this year, output growth rate in the first seven months of this year reached 6.3% and 6.6% respectively. It is expected that the annual crude steel output will reach 900 million tons, showing no signs of slowing down because of limited production.
The previous upward fluctuations of steel prices were not caused by limited production, but more vigorous demand which consumed the growing output. Similarly, the main reason for this round of steel price drop can’t be attributed to the reduced effect of production restriction.
So, what is the main reason for the fall in steel prices for this round? Nothing else, but from price rise itself. Like any other commodity, steel prices can’t keep rising. As the steel market continued to rise by some hundreds of RMB/ton in the previous period, the profit per ton of steel has also increased significantly. This led to a reverse change in the supply and demand relationship in the steel market. Fears grew as the price kept climbing. In addition, speculative capital was also dealing with high risk because of the continuous rise in steel prices. It also needs a wave of market decline to seek new operational potentials. All of this has created requirement for a technical downturn in steel prices. At this point, market participants must be highly vigilant and prepared for risks.
It can be seen that there is no fundamental changes in China’s steel market, especially the inventory pressure is not very large and this round of steel prices decline is the self-correction and adjustment for the previous price increase. Therefore, after the setback, the steel market will continue to run at a high level.
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