U.S. import tariffs have brought global attention to steel in recent weeks, hitting its price. But it is China that has really made investors anxious, with appetite in the world’s biggest steel consumer falling short of expectations so far this year.
Growth in Chinese steel demand is decelerating and inventories have remained stubbornly high despite Beijing-imposed winter production cuts. This torpid demand growth and big stockpiles have worried investors and analysts.
The price of steel rebar futures have slumped 12.6% so far this year, closing at RMB3,452 on March 23, according to Macquarie.
In the first two months of 2018, Chinese steel production grew 4.1% year-on-year, far higher than the 2.5% increase seen in the rest of the world, according to Macquarie. In the first two months of 2017, Chinese production contracted by 0.5%, the bank said.
“Steel demand is starting to grow at a slower pace. We’re past the peak of the industrial growth cycle… and there’s a lot of concern about China and its inventories — which have been too high,” said Colin Hamilton, managing director of commodities research at BMO Capital Markets.
Analysts turned bullish on steel at the end of last year, anticipating cuts aimed at cutting pollution in heavily-populated areas of China during the winter would prompt a reduction in supply early this year.
“Our thesis had been that inventories would run low from that cut …. but inventories surged in late February and early March,” said Seth Rosenfeld, managing director of equity research, metals and mining at Jefferies.
There has also not been the usual pick-up in demand in China that you’d normally see at this time of year, said Serafino Capoferri, commodity research analyst at Macquarie.
Analysts give several reasons for that change.
“Credit conditions have been reasonable, construction activity [has been] weaker than expected, exports [are] low compared with last year, and importantly, steel margins [have been] strong keeping production volumes high,” BMO Capital Markets’s Mr. Hamilton said.
Over recent weeks, though, investors’ attention has been fixed on U.S. steel tariffs. In March, the White House imposed a 25% levy on some steel imports, including China, and later announced it was mulling further tariffs aimed at the country worth $60 billion. China reacted with its own measures and the promise of more should the U.S. escalate.
Though the Sino-American steel trade is relatively small — China is not even in the top 10 origins of U.S. steel imports — the introduction of U.S. levies has damped sentiment. That’s even though the extent of the White House’s levies is still uncertain, as discussions about exemptions continue.
“There’s a lot of incomplete information out there, leading people to take a negative view of [the tariff's] impact on the market,” said Jefferies’s Mr. Rosenfeld.
To be sure, some analysts don’t see Chinese demand falling away.
For a start, Chinese economic data has proven resilient so far this year, confounding the expectations of dwindling economic growth.
Data from Mysteel.net, a Chinese steel news website, released on Thursday for the week to March 23 also showed a 4.3% on-the-week drop in Chinese steel mill inventories. Some analysts even say steel prices may now rally.
“I’m starting to see inventories calm down… I was in China a couple of weeks ago and the sentiment there seems pretty good,” said Macquarie’s Mr. Capoferri.
But others predict prices slipping further.
“As winter [production] cuts roll off and production rises, we see a risk of the slowing real demand being exposed in the form of weaker steel price,” said Credit Suisse analysts in a note. “That will likely come through in an array of macro data out of China which may add additional short-term sentiment stress to the sector.”