FOCUS: Why China’s steel prices are increasing despite rising inventories
Market sources have been puzzled by the gradual upward trend in China’s steel prices after the novel coronavirus (2019-nCoV) broke out in a big way after the Lunar New Year holiday.
Spot prices gained further momentum in the first few days of March, even though the number of infections in China has continued rising, and steel inventories have surged.
Fastmarkets’ price assessment for steel hot-rolled coil (HRC) domestic, ex-whs Eastern China, was at 3,510-3,520 yuan ($506.27-507.72) per tonne on March 5, up 20-30 yuan per tonne from 3,480-3,500 yuan per tonne on February 28.
And Fastmarkets’ price assessment for steel reinforcing bar (rebar) domestic, ex-whs Eastern China, was at 3,430-3,450 yuan per tonne on March 5, up 50-60 yuan per tonne from 3,370-3,400 yuan per tonne on February 28.
Total steel inventories for five major steel products - HRC, cold-rolled coil, plate, wire rod, rebar - totaled 19.05 million tonnes in 20 major cities at the end of February. This is up 1.70 million tonnes or 9.8% from 17.35 million tonnes on February 20, according to data released by China Iron & Steel Association (Cisa) on March 5.
Two key steel products, HRC and rebar, had inventories of 2.69 million tonnes and 9.49 million tonnes, respectively, up by 6.5% and 12.7% compared with February 20.
However, the high inventories failed to push down steel prices despite rising demand, the bullish outlook of market participants and rising production costs.
Why is this so?
The recovery in end-user demand has accelerated in March after it became apparent that China had controlled on the spread of 2019-nCoV in the country.
Workers have begun to return to big cities in the past few weeks and even more are ready to return to work after 14 days’ quarantine, industry analysts said.
The gradual resumption of logistics services has also supported the resumption of activities at many businesses.
About 1.68 million units of heavy trucks were working on a daily basis nationwide in the week ending Sunday March 1, according to the China Federation of Logistics and Purchase. This is equivalent to a daily operating rate of 27.2%, up 11.5 points from the preceding week, the federation said..
The capital city, Beijing, had resumed work at 489 construction sites by March 3 and the labor force in the construction sector is expected to increase by some 3,000 people per day through the rest of March, according to the Municipal Commission of Housing and Urban-Rural Development.
In key manufacturing province Jiangsu, 98% of large and medium enterprizes had resumed operations by the end of February, according to state-owned news press Xinhua.
“The daily sales volume of rebar is above 100,000 tonnes per day this week, twice that of last week,” a trader in Shanghai said, quoting a local industry information provider.
Bullish expectations despite thin trading
Few sellers are aiming to cut offer prices despite the thin trading seen in the past few weeks.
Domestic spot trading of HRC remained illiquid, with sales only half of what they were before the 2019-nCoV outbreak, market sources told Fastmarkets.
“Sellers prefer to hold stocks for a while rather than selling them at low prices, because most sellers believe prices will rebound soon on recovering demand,” the Shanghai trader added.
The Chinese government is also taking measures to boost construction activity and infrastructure development, with China’s National Development & Reform Commission (NDRC) had approved 228.6 billion yuan of infrastructure projects up until March 3 this year, up 93 billion yuan or 68.62%, from the same period last year, according to a securities research institute.
A total of 11 provinces in China have also unveiled infrastructure development plans of nearly 30 trillion yuan for 2020.
“So we believe the worst has passed,” the Shanghai trader said. “We were struggling to trade the first [few] days after China resumed work, [but] while the situation hasn’t recovered fully, we are bullish for the near term and expect more sales soon.”
Cashflow turns rich
The low steel prices seen between February 3 and 17, occurred because some steel mills and traders were rushing to offload material on seeing their mounting inventories.
“We had to sell, mainly because we were short of liquid cash. No matter how low the prices were, we had to ensure sufficient cashflow to maintain operations and stay afloat,” the trader said.
However, after that initial round of selling, steel market participants were no longer in a rush to sell, a Tianjin-based trader said.
“I heard that, although inventories at steel mills remain high, they have already secured sufficient orders for March-production cargoes,” he said.
“And prices are likely to stay [where they are] until mid-March. Although it’s hard to say what will happen after that. Prices could rise further if demand picks up, but may also tumble if inventories keep increasing,” he added.
Slowdown in rising stocks
“Steel mills cut production and demand has gradually increased, causing the rise in spot market inventories to slow down [compared with] the previous few weeks,” a trader in eastern China said.
Cisa reported a 9.8% rise in spot market inventories on February 29 compared with February 20, slower than the 17.9% increase registered between February 10 and 20.
Cisa’s member mills had 20.48 million tonnes of finished steel in stock on February 29, down 856,800 tonnes or 4.01% compared with February 20, according to data published on March 5.
“The slowdown in the rate of increase [is] a signal that the overstock will not be getting worse [and that will] support steel prices,” the second trader said.
The high production cost caused by the recent gains in iron ore prices was one key reason for the climbing steel prices, market sources said.
Fastmarkets’ daily 62% Fe iron ore fines, cfr Qingdao, index was at $92.57 per tonne on March 5, up $8.61 per tonne or 10.25% from $83.96 per tonne on February 28.
“Brazil’s iron ore supply drop in February may keep China’s import prices at high levels, which makes it hard for mills to gain profits,” the first industry analyst said.
“Many steel mills are likely to be seeing zero margins now, so they need to keep steel prices from dropping further,” he added.