Positive mood amid mixed fundamentals, property stimulus news boosts Chinese steel market

Over the past few weeks, steel and raw material prices in China have been following a gradual uptrend, which has been making market participants question how sustainable this tendency is. Today, November 15, sentiments in the Chinese market have strengthened again, with more talk emerging about approaching large-scale funding to support the struggling property market. Accordingly, market sources still believe that prices will be highly sentiment-dependent in the coming few weeks.

Sentiments outweigh demand movements

According to a Bloomberg article published on November 14, China will this month start to inject the first funds out of its totally planned 1 trillion RMB ($137 billion) for the fourth quarter. The measures will be used to support urban village renovation and affordable housing. This is important news for the property market, which has been struggling lately with the January-October data still looking not promising: investments fell by 9.3 percent, versus 9.1 percent in the January-September period, and new construction areas still dropped sharply, by 23.2 percent year on year (just slightly better than the 23.4 percent fall in January-September).

Moreover, today, November 15, China announced better-than-expected October retail sales (up 7.6 percent versus a 5.5 percent rise in September) and industrial production (up by 4.6 percent versus 4.5 percent). This news together with the expected visit of China’s President Xi Jinping to the US have provided visible support for sentiment in the Chinese market.

In particular, rebar and HRC futures at the Shanghai Futures exchange have added 1.63 percent and 1.34 percent respectively compared to yesterday. This has also triggered rises in the spot steel market in China, with average local billet, rebar and HRC prices adding RMB 40-48/mt ($5.6-6.7/mt) today compared to yesterday, according to SteelOrbis’ data. “Physical sales are active today [in the local Chinese market], supporting this rise in prices,” a trader said.

Sentiments have been the main driver in the Chinese market lately and this is unlikely to change in the near future, according to market sources. “In China’s domestic market these days, demand can improve day by day, but in general it is not that better, only the noise is louder, waking the whole neighborhood, like Vietnam,” another major Chinese trader said.

Production cuts more visible, but should still deepen further

Production cuts in China have been more visible in the October-November period, providing support for prices, however, they have still not been as big as expected. In October, China’s crude steel output was 79.09 million mt, declining by 1.8 percent year on year, while also down 3.7 percent month on month, as announced by China's National Bureau of Statistics (NBS). However, January-October production was still 1.4 percent higher year on year.

“Production cuts were mainly affecting sinter production, while blast furnaces were working at higher rates. They still keep working now, but some have started to face output cuts finally,” a Chinese mill said, explaining the situation in November. “In my personal experience, production cuts are more an instrument for sellers to hike offers rather than being a real fall in steel production,” a large trader, working in the HRC segment, said.

Moreover, since China is entering the weak season for consumption with colder weather already started in some parts of the country, steel mills in China will have to deepen production cuts to support prices in late November-early December. “Winter is coming, so demand is going to be slower and the room for growth [for prices] will be smaller and smaller each time,” another trader told SteelOrbis.

One more important factor for steel prices in China to stay at higher levels in the coming weeks is the still elevated cost of production and limited margin. Though crude steel production in China has been going down, it has not resulted in an easing in iron ore prices. On the contrary, increases in futures and positive sentiments have pushed iron ore prices above the $130/mt CFR mark last seen in March this year. Nevertheless, raw material prices have much less fundamental support for upward movement compared to steel prices. In particular, today China’s NDRC sent officials to the Dalian Commodity Exchange to monitor prices, which will affect futures and spot prices after the recent highs they have reached.

Spot steel and iron ore prices in China on November 15

$1 = RMB 7.1752