Chinese longs market troubled by increasing inventories

China's domestic long product prices continued their downward movement in the past week. Since market prices are now at their lowest levels since March and also given the limited decrease in mills' ex-factory prices, some traders have lately bought in materials with a view to speculating on a possible rebound. However, the Chinese longs market still faces great difficulties in terms of upward movement in the future, especially as the continuous rise in inventory levels has brought considerable pressure to bear on market prices.

Over the past week, long product prices in eastern China went down continuously, by a margin of RMB 120-350/mt, with the rebar prices in Shanghai, Hangzhou, Fuzhou and Nanchang all down below the level of RMB 3,800/mt. At the end of the week, the leading eastern mill Shagang issued its ex-factory prices for late August, announcing a smaller decrease than the market had been expecting; this was followed by a minor recovery in market quotations, but with no obvious improvement recorded in the volume of commercial activity.

Meanwhile, market prices in Beijing and Tianjin also dropped considerably during the past week, by RMB 300/mt or so. Due to the strong price increases recorded previously, traders still seemed to be quite nervous during the past week despite the overall correction observed in the market. In addition, the local authorities in Beijing have asked all construction sites in the city to suspend their work from September 15 to October 8 (a period which includes the National Day holiday on October 1-8), and this is expected to have a strong impact on some medium and small traders.

Affected by the continuous strong declines in the northern and eastern Chinese markets as well as by the decrease in the steel futures market, the mood of panic among traders has been exacerbated in the southern regions. As a result, local traders in these regions lowered their quotations sharply, driving down overall market prices rapidly. As regards market trading, since players have been unwilling to buy as prices continue on the way down, commercial activities have appeared slack in the various southern markets during the past week.

Long product inventory in China kept climbing during the past week. According to a survey of large warehouses across China (excluding the autonomous regions of Xinjiang and Tibet), rebar inventory totaled 3.92172 million mt, up 199,460 mt week on week; meanwhile, wire rod inventory came to 1.22286 million mt, up 140,030 mt.

However, there is also some good news for the Chinese longs market. The latest figures released by China's National Bureau of Statistics show that the average daily output of long products in the month of July posted a minor decline compared with the previous month. In July, Chinese rebar production totaled 10.43 million mt, up 2.6333 million mt or 33.77 percent year on year. Daily output during the month in question was 336,500 mt, down 28,600 mt or 7.84 percent compared to June. The total production in the January-July period reached 68.233 million mt, an increase of 12.8363 million mt or 23.17 percent.

In July, Chinese wire rod production totaled 8.594 million mt, up 1.4302 million mt or 19.96 percent year on year. The daily output during the month in question was 277,200 mt, down 13,000 mt or 4.48 percent month on month. The total production in the January-July period reached 53.233 million mt, an increase of 5.0144 million mt or 10.4 percent.

Summing up, while long product prices in China recorded another remarkable decline in the past week, market prices are thought unlikely to plummet further in the short term given the correction which has already taken place, with a fluctuating trend or even a slight rebound expected for the near future. However, in the long run the domestic market will not shake off its overall downward tendency until market inventory and steel production levels are reduced.