MNI: China's Steel Futures Face Downward Pressure In H2

China’s steel rebar futures are likely to face further downward pressure in the second half of the year, as consumption remains weak amid insufficient stimulus and soft export demand, while planned production cuts may fall short of market expectations, local analysts told MNI.

The October contract on the Shanghai Futures Exchange may fluctuate between CNY2,900-CNY3,150 per tonne in H2, likely rising initially on improved sentiment following authorities’ latest call for the withdrawal of obsolete production capacity and a seasonal rebound in coal prices, before softening on limited output reductions and a lack of demand support, said Zhuo Guiqiu, senior researcher at Jinrui Futures.

The latest overcapacity-cutting campaign has focused mainly on downstream industries such as photovoltaics and autos, which is bearish for steel consumption, Zhuo noted.

Guo Xinjie, an analyst at commodity service provider JLC Network Technology, expects prices to range between CNY2,700-CNY3,300 per tonne, citing limited upside due to weak demand and ample supply of iron ore and coal inputs.

The October contract closed at CNY3,139 per tonne in Friday morning Asia trading.

STEEL CONSUMPTION

Consumption from the real-estate sector is expected to continue falling in H2 as the industry focuses on de-stocking, following a 12.7% y/y decline in crude steel consumption during the first five months, Zhuo said.

Infrastructure and manufacturing demand may also moderate, with policy support for large-scale construction and the consumer goods trade-in programme waning over H2, he added. (See MNI: Beijing Preps Policy-based Bonds Aimed At Infrastructure) 

“Domestic car and home appliance sales are expected to decelerate, while exports of steel-made products may also decline on a monthly basis, as exporters front loaded shipments in H1 amid tariffs disruptions,” Zhuo said, pointing to ongoing trade barriers and multiple anti-dumping investigations that are expected to reach preliminary conclusions by year-end. (See MNI: China Advisors Hopeful Of US Trade Deal By Mid-August)

JLC Analyst Guo Yang anticipated a drop in overseas sales of around 5 million tonnes y/y in H2. “While the accelerated issuance of government bonds for infrastructure construction could help offset falling exports, it would not make up for the real-estate downturn,” Guo added.

Authorities should consider a real-estate stabilisation fund financed by additional treasury bonds that could truly lift steel demand, he argued. 

OUTPUT CUT

While markets had initially expected output cuts to reach about 20 million tonnes this year, Zhuo said implementation could fall short as local governments face pressure to meet growth targets. (See MNI: China's GDP Faces H2 Growth Challenges) “The cut more likely depends on steel mills to take the initiative to destock,” he said, forecasting a full-year reduction of around 10 million tonnes. 

JLC Analyst Zhu Shanshan noted that mills may lack incentives to cut production significantly, given low inventories and ongoing profitability, which suggests supply is not far out of line with demand.

“An over 10 million tonne cut was achievable should authorities maintain their intensity nationwide for several months,” Zhu continued, citing Tangshan city’s recent emission curbs that saw the city shutdown equipment affecting at least 30% of total capacity in early July, which is expected to cut molten iron output by around 50,000 tonnes per day.

However, Zhu added that even such cuts would offer only limited and short-lived support for prices amid ongoing demand weakness.