China’s steel prices drop amid weakening demand, more decline expected in Q4

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China’s steel prices decline rapidly amid weakening demand and lower material prices and prices are likely to slide further in the fourth quarter, said industry insiders.

“Demand from several steel-consuming industries is sliding. The steel rebar industry slipped from a strong rally into broad losses last month,” a steel product salesperson surnamed Wu at a leading Chinese steelmaker told Yuan Talks.

The China Iron and Steel Association (CISA) said at a meeting on October 25 that in the first first three quarters of the year, domestic steel demand maintained largely stable before gradually falling, while the growth rate of steel production have been slowing.

On the supply side, crude steel output increased 16% year over year in the first quarter, up 8% in the second quarter and fell 15% in the third quarter, according to data from the association. In particular, average daily crude steel output in September fell 21.2% from a year earlier to 2.458 million tonnes, marking the lowest level in nearly three years and sliding 24.6% from a high in April.

On the demand side, due to factors including restrictions on power use, steel consumption in tension declined by more than 20% in September from a year earlier, meaning that steel consumption fell faster than supply.

“Both policy environment and market conditions are unfavourable for the steel sector. Steel demand is expected to decline further in the fourth quarter,” said a sales manager at a steel pipe company who prefer not to be named.

Since October, real estate and infrastructure have both slowed and overseas demand for the manufacturing sector have also weakened, with output of automobile and home appliances sliding. The factors combined pushed steel demand into a downward channel,” he said.

In addition, due to saturation in the construction machinery market, steel demand from machinery manufacturers, a traditional top steel consumer, has also declined, said Wu.

According to a new research note from Chasing Futures, demand for construction materials was weak and steel demand has declined faster than expected.

The trend of economic structure adjustment and risk preventions, including liquidity risks in the real estate sector, financial risks and local government hidden debt risks, is continuing, leading to drops in steel demand.

Several industry insiders told Yuan Talks that steel market demand started cooling in October, with plunging steel rebar prices causing particular attention.

Since mid-October, steel rebar futures have been falling, with the main January contract dropping below 5,000 yuan/tonne in late October. As of last Friday, the contract had fallen below 4,300 yuan/tonne.

“We suffer loss when prices hit 5,200 yuan per tonne. Prices falling below 5,000 yuan per tonne means sector-wide losses. The shift from market rally to sector-wide loss happened in a matter of ten days,” said Xiao, adding that all steel makers are suffering loss for their steel rebar production and many have been forced to cut or suspend steel rebar capacity.

According to Chasing Futures report, against the backdrop of weakening real estate sector, infrastructure investment grew at a pace largely in line with apparent demand of steel rebar, adding that the weaker-than-expected infrastructure investment is one of the major reasons for the faster-than-expected decline in steel rebar demand.

Donghai Securities said in a note that market focus will remain on demand in the short term and so far, there hasn’t been signs of notable improvement.

Apparent demand of steel rebar is expected to declined by another 25% this week, and meanwhile, declines in material prices will drive lower steel products’ cost line, leaving more room for steel price declines, it said.

Zou Jinxin, chairman of Baosteel, had said earlier this month that the expansion cycle for China’s steel industry has ended after the government stepped up restrictions on steel production in recent years and going forward, steel output will continue shrinking, easing the excessive competition in the sector.

The sector’s recent challenges came after they posted strong growth in the first three quarters of the year. Their revenue jumped 42.52% year over year in the period to 5.3 trillion yuan and their profit surged by 123% to 319.3 billion yuan. Their sales profit margin was 6.03% in the period, up 2.18 percentage points from a year earlier.

Among the 53 steelmakers listed on the A-share market, 46 saw net profit more than double year over year in the first three quarters.

Since the second half of the year, China’s coal prices surged by three – four times from a year earlier, which brought huge pressure to the steel sector.

According to data from the China Iron and Steel Association, prices of major steel-making material jumped across the board. In the period of January – September, average price of iron ore imports was $171.67, surging 72.64^ from a year earlier, prices of coking coal jumped 57.07% and prices of coke rose 56.88% and prices of scrap steel grew 36.48%.

Since September, due to the tight power supply, many steelmakers reduced or even suspended production, which also drove up production cost, said Qu Xiuli, deputy head of the China Iron and Steel Association, adding that the rising cost pressure unlikely to change in the short term and steel makers face downward pressure on profitability.