China's rising steel stocks cap price recovery despite output cuts

China's crude steel production edged lower in early July as seasonal demand weakness prompted mills to scale back operations, but the output cuts have failed to prevent inventory growth as downstream consumption weakened faster than production cuts, capping upside potential for the hot-rolled coil and rebar prices, according to data from the China Iron & Steel Association and market participants.

Daily pig iron output at CISA member mills averaged 1.865 million metric tons over July 1-10, down 1.8% from late June and 3.4% lower year over year, CISA data released July 15 showed.

Crude steel production averaged 2.022 million mt/day during the period, slipping 0.1% from late June and 3.6% below year-ago levels.

The production decline reflects the traditional summer slowdown in manufacturing and construction activity, which typically weighs on steel demand and mill profitability during the peak heat months.

Blast furnace utilization rates at Chinese mills averaged around 90% in mid-July, down about one percentage point from early July and roughly one percentage point lower than a year earlier, according to a mill source and a steel industry analyst.

Despite the production decline, finished steel inventories at mills and major spot markets monitored by CISA rose to 26.46 million mt as of July 10, up 3.2% from end-June and 16% higher year over year.

In particular, the hot-rolled coil and rebar market inventories were at 2.24 million mt and 4.1 million mt as of July 10, about 21.7% and 37.6% higher year over year, respectively.

A mill source, a trader and a steel industry analyst said output of both HRC and rebar declined further in mid-July as demand weakened during the slow summer seasonal demand, which could help limit further inventory accumulation.

"With manufacturing and construction demand weakening in July and steel prices falling, mill profitability has weakened compared with June, so a decline in steel production is fully expected," a mill source said.

"However, given the weakness in end-user demand, production cuts on the current scale may not provide enough support to drive steel prices higher," the mill source said.

The source added that any meaningful rebound in steel prices could encourage mills to slow the pace of output reductions, making a sustained price recovery difficult. The mill source and a trader both said end-user demand lacked clear growth drivers, leaving the steel market likely to remain rangebound at relatively low levels.

Weak consumption indicators have reinforced concerns over steel demand.

Data released by the China Passenger Car Association on July 15 showed domestic passenger vehicle retail sales totaled 443,000 units during July 1-12, down 1% from the same period in June and 15% lower year over year.

Market participants often view passenger vehicle sales as a key gauge of consumer goods spending and manufacturing activity.

On the construction side, high temperatures and frequent rainfall have slowed construction activity and reduced demand for long steel, such as rebar, in July, according to the steel industry analyst.

However, the analyst said that construction steel demand had already fallen in June from May levels, suggesting that further downside in July may be modest.

"As a result, both the upside and downside for steel prices appear constrained in the near term," the analyst said.

Platts, part of S&P Global Energy, assessed domestic HRC at Yuan 3,340/mt ($493/mt) and rebar at Yuan 3,070/mt on July 16.

The assessments were down Yuan 180/mt and Yuan 260/mt, respectively, from recent highs reached on May 11, but were largely unchanged from end-June levels, reflecting a market caught between falling production and persistently weak demand.