CISA cautiously optimistic about steel market in Mar

 Mar 04, 2015  09:54:23

Market review

In Feb, the domestic steel market held stable, with the demand tending to stagnate and traders focusing on retrieving payables. Transaction remains poor due to a lack of any improvement in downstream demand post the Spring Festival. On Feb 28, billet price in Tangshan fell to RMB1930/tonne, undermining the cost support for steel prices; however, section steel price and medium plate price nosed up RMB80/tonne and RMB20-30/tonne respectively, while prices of other steel products held stable on a weak note.

On Feb 28, in Shandong, HRB400 rebar price came at RMB2370-2390/tonne, up RMB10/tonne m-o-m; HRC price contracted RMB10/tonne m-o-m to RMB2490-2520/tonne; medium plate price rose RMB20-30/tonne to RMB2510-2520/tonne.

Forecast on market trend

In the face of the rising economic downside pressure and deflation risk, the PBOC has cut RRR and interest rate to further loosening the monetary policy. In Feb, steel PMI rallied 2.1 ppt m-o-m to 45.1%, suggesting the improving business climate of steel industry; however, the reading has been below 50% for ten consecutive months. The average daily crude steel output in mid Feb and the products inventory in early Feb of the CISA’s members both increased, pointing to the mounting supply pressure. On Feb 27, the social inventories of the five main steel products totaled 14.7398mn tonnes, up 1.0804mn tonnes from the volume on Feb 20. Meanwhile, with the weather getting warm, infrastructure construction projects will be restarted or come under construction in Mar and Apr. In addition, the opening of the two sessions of NPC and CPPCC will also stimulate infrastructure construction investment, which may boost the demand for steel products. However, given the high steel capacity and mounting social inventories, the demand won’t be huge enough in Mar, so the upside room of steel prices is limited.

The factors influencing the performance of the domestic steel market

1.    The economic growth comes under huge downside pressure

In Feb, China’s manufacturing PMI inched up 0.1 ppt to 49.9%, but it stayed in the contractionary territory. In Jan, CPI grew 0.8% y-o-y, below 1% for the first time since Nov 2009; PPI dropped for the 35^th consecutive month by 4.3% y-o-y and 1.1% m-o-m. Meanwhile, China produced and sold 2.287mn and 2.3196mn automobiles, down 0.1% and 3.8% m-o-m and up 11.5% and 7.6% y-o-y respectively. In Feb, the PBOC cut deposit RRR by 0.5 ppt, accelerated injecting money into the market via MLF, SLF and open market operations and lowered the benchmark loan rate by 0.25 ppt at the end of Feb. In conclusion, in 2015, the economic downside pressure remains huge, but the government is stepping up the efforts to combat the downside pressure.

2.    Demand may pick up, but steel prices won’t gain muchWith the weather getting warm in Mar, infrastructure construction projects will be restarted or come under construction. The nearly RMB1tn infrastructure construction projects published earlier and the “One Belt and One Road” projects will come under construction. In addition, the opening of the two sessions of CPC and CPPCC will also stimulate infrastructure construction investment, which may drive up the demand for steel products. However, the historical data indicate that the steel price has been less and less volatile around the Spring Festival during the recent years, advancing 13.61% within the 30 days post the 2008 Spring Festival and falling 1.67% within the 30 days post the 2014 Spring Festival. Steel price mounted up during the 15 days post the Spring Festival in 2008-2013 and advanced during the 30 days post the Spring Festival in only a few years. In addition, traders have been less and less willing to spike the prices during the 15 days post the Spring Festival over the recent few years.

3.    Steel output continued to edge up

According to the CISA, during the second ten days of Feb, the daily crude steel output of key steel mills averaged 1.6376mn tonnes, up 9,600 tonnes or 0.6% from the figure during the previous ten-day session; by the end of mid Feb, the product inventories of key steel mills added up to 16.4667mn tonnes, gaining 1.5495mn tonnes or 10.4% from ten days ago. Downstream demand stagnated during the Spring Festival, causing an increase in the distributors’ stockpiles. In Mar, the product inventories of steel mills are expected to keep swelling.

4.    Social inventories of steel products continued climbing

On Feb 27, the social inventories of five main steel products in the major cities totaled 14.7398mn tonnes, up 1.0804mn tonnes w-o-w. To be specific, the rebar inventory posted 7.2759mn tonnes, up 570,200 tonnes; wire rod inventory came at 1.851mn tonnes, up 276,200 tonnes; HRC inventory arrived at 2.9037mn tonnes, up 114,700 tonnes; CRC inventory was 1.5247mn tonnes, up 37,600 tonnes; and medium plate inventory climbed 71,600 tonnes w-o-w to 1.1087mn tonnes. What happened in the past few years tells that the social inventories of steel products will keep mounting up during the several weeks post the Spring Festival and usually peak during the fourth week post the holiday. 

5.    Raw material prices fluctuated at low levels

On Feb 28, billet price in Tangshan dropped to RMB1930/tonne, undermining the cost support for steel prices further. Prior to the Spring Festival, imported iron ore price bounced back slightly and then retreated. On Feb 27, Platts 62%-Fe iron ore price index closed at USD62.75/tonne, down USD1.25/tonne from that prior to the Spring Festival. A majority of domestic steelmakers have built enough iron ore stockpiles and won’t purchase iron ore in a large scale in the near future, so the market is pessimistic about the future iron ore market. The ANZ Bank estimates iron ore price to drop 25% and 30% to USD58/tonne and USD60/tonne respectively in 2015 and 2016. In conclusion, imported iron ore price will fluctuate at a low level in the short run.eading steelmakers are cautious

Lately, Baosteel, Angang, WISCO and Magang, the leading steel mills in China, lowered their ex-w prices by RMB100-200/tonne for Mar deliveries, showing their cautious attitude towards the future steel market.

-edited by Mysteel.net

-To contact the editor on this report at maowx@mysteel.com.cn or hizach@mysteel.net.cn