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China steel market expected to weaken in July amid rising inventories: Platts Analytics


Prices, new orders to fall in July

Rebar margins below breakeven

Manufacturing activity hit by pandemic

Chinese steel orders, output and prices are all set to soften this month, while inventories will continue to climb due to the seasonally weaker time of year, according to S&P Global Platts Analytics' China Steel Market Expectations for July.

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New orders, production and prices have been given a score of two out of five for July, while inventory was awarded a score of four out of five. The scores range from one (lower) to five (higher) to determine the likely market trends in the coming month.

July can be one of the weakest months of the year for steel demand in China because seasonal hot and rainy weather curbs downstream activity, such as construction.

This has been compounded by tighter credit conditions and deteriorating sentiment, which have already been weighing on steel demand and prices.

China domestic rebar margins averaged $30/mt in June compared with $149/mt in May and were below breakeven levels in the final week of the month, according to Platts Analytics. Domestic hot-rolled coil margins averaged $62/mt in June, down from $155/mt in May. Margins have deteriorated due to weaker finished steel prices and high iron ore and coking coal prices.

Steel production could fall slightly in July but is expected to remain robust, with softer downstream demand resulting in a rise in steel inventories.

Stocks of hot-rolled steel rose to 3.78 million mt on June 24, up from 3.5 million mt a month earlier, according to China Iron & Steel Association data.

Rebar stocks were 7.63 million mt on that day, compared with 7.47 million mt around a month earlier.

On the end-user side, manufacturing activity weakened in June with the pandemic curbing demand in China and overseas, though weaker steel prices helped ease cost inflation pressures.

The "official" manufacturing purchasing managers' index published by the National Bureau of Statistics fell to a four-month low of 50.9 points in June, down from 51 in May. Production was also at a four-month low, while export orders dropped for the second consecutive month.

The PMI compiled by Chinese media company Caixin fell to 51.3 in June from 52 in May. In its report, Caixin noted softer overall conditions and said that factory gate prices rose at the slowest rate since February despite high costs of materials such as steel.

Any downturn in manufacturing would be a concern as the sector is expected to help offset slower demand from property and infrastructure over the second half of 2021.

Data from China's Electricity Council shows that ferrous sector consumption peaked this year at 56.9 billion kWh in May. A decrease in June and July would indicate that steel production has finally started to fall.