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Steel rebar selloff continues with more uncertainties expected

China’s benchmark steel futures is having a selloff these days after hitting a seven-year high last week, raising questions whether the commodity is finally ending a rally that lasted for nearly five months.

The Shanghai Futures Exchange benchmark steel rebar contract closed at 4,086 yuan a tonne on Friday, having retreated from the seven-year high of 4,418 yuan a tonne, reached on August 22. Steel futures gained about 29 per cent from the end of last year to their recent peak, as Chinese steel factories enjoyed the strongest profits in recent years boosted by output curbs amid an environmental protection campaign and continued efforts to cut outdated and less efficient capacity.

“The prospect of monetary easing and stepped-up environmental protection measures had been driving steel price to a level that raises concerns, ” said Ma Li, chief analyst at Lange Steel.

“The scale of the correction is beyond expectations, indicating a lack of confidence in the market, especially when investors’ expectation for stronger demand has not consolidated further,” said a commodity strategist at a private equity fund in Shanghai.

Besides uncertainties over domestic demand, exports of steel products have been trending lower this year, with shipments of products in the first seven months slipping 13.6 per cent to 41.3 million tonnes. The escalating trade dispute with the US and imposition of duties by other countries on Chinese steel means exports are unlikely to return to growth any time soon.

“Investors have started to doubt whether steel mills’ high margins are sustainable,” said the strategist.

Improving profits have allowed steel mills to boost production, with output to end-July grew 6.3 per cent compared with the previous year to 532.85 million tonnes, as profit margins reached around 1,100 yuan a tonne, according to Huatai Futures.

The marginal effect of the production restrictive measures, which have been the major support for the price rise, are weakening, according to the CITIC Futures.

For commodity investors, “the opportunities in the third quarter is coming to an end,” said Ao Zhong, analyst at the CITIC Securities, “they should close long positions on steel-related assets and pay attention to more opportunities in the upcoming heating season.”

However, other market watchers believe the current decline is just a technical correction and remain bullish on steel thanks to less supplies amid tougher production restrictions.

“Considering the reducing supplies, we are still bullish on steel prices as the supply-side reform is still one of the major themes in China,” according to the Argonaut Securities.

Steel rebar price is expected to trend higher after a short-term fluctuation, said Sun Hui, research director at Chinese commodity information provider Xiben New Line Stock.

“Tough environmental protection measures are becoming a new normal and covering wider areas, steel rebar spot price is likely to climb to 5000 per tonne in the upcoming winter, ” said Sun.

Tangshan city in Hebei province, China’s major steel production base, launched intensive environmental inspections recently, ordered 50 per cent steel production cut between 29 August and 3rd September, and more importantly it’s reported that the city will start winter production restrictions next month, compared to October-November previously.

Other cities in Hebei, as well as Shandong province and Jiangsu province also stepped up environmental protection inspection recently, after the State Council released 2018-2020 plan in July expanding pollution controls to 82 cities, under which polluters will receive punitive charges with the introduction of a national pricing system for carbon emissions and the contamination of water, besides other stringent measures.

The steel rebar futures is expected to swing for a while but the downward room is limited, as low inventories are expected to support spot price, which will help form a rebound in the price of steel rebar futures as its spread with the spot price widens, according to the CITIC Securities.

According to Mysteel, as of 23 August, social inventory and factory inventory stood at 4.38 million tonnes and 1.63 million tonnes respectively, 48,000 metric tons and 2300 metric tons lower than a week earlier.

The inventory level is expected stay relatively low in the short time, according to the CITIC Futures.

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