China's steel market has reached an inflection point with a lot of uncertainty around the near-term direction, borne out by extreme volatility in the physical and futures prices.
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Given this scenario, both steel prices and orders were given a neutral score of three out of five in the monthly S&P Global Platts Analytics China Steel Market Expectations.
Steel inventory and production were both given a score of four out of five for June. The score ranges from one, being the lowest, to five, being the highest, using a view based on market feedback and seasonal factors.
Taken together, the scores would indicate downward pressure on steel prices in June as production is expected to increase further, resulting in rising stocks amid softer demand due to the start of China's rainy season.
Platts Analytics expects a crude steel production rate of 3.29 million mt/day in June, which would potentially lead to a monthly output of 100 million mt for the first time. China produced a record 97.8 million mt in April, with the year-to-date output rising 16%, according to the National Bureau of Statistics.
Platts Analytics has upgraded its forecast for crude steel production in 2021 to an 8.6% increase year on year to 1,157 million mt, from an earlier forecast of 2% growth on the year.
The steel market in June is coming off a month of high volatility, with iron ore prices ranging from $186/mt to $233/mt CFR China in May. Steel and iron ore prices rose over the first half of May but fell in the final week of the month in response to the China government's efforts to curb rising commodity prices.
Steel margins fall
Domestic hot-rolled coil margins averaged $152.09/mt in May but fell to $40.81/mt on June 2, according to Platts Analytics. The margins for rebar averaged $151.52/mt in May but stood at $35.67/mt on June 2. Margins have been squeezed by weaker finished steel prices and high iron ore prices.
The stocks for HRC in major China cities stood at 3.50 million mt on May 27, compared with 3.43 million mt a month earlier, according to the China Iron & Steel Association. Rebar inventory was around 7.47 million mt on May 27, down from 9.08 million mt the month before, but stocks are likely to rise over June and July due to the seasonal weather factors in China.
From a demand perspective, manufacturing was robust in May despite rising steel prices adding to cost pressures. The manufacturing purchasing managers' index, or PMI, published by the China-based media company, Caixin, rose from 51.9 points in April to 52.0 in May. Caixin said that higher purchasing costs had "dampened the latest upturn in output." The PMI published by the National Bureau of Statistics dropped in May, to 51.0 from 51.1 in April.
Platts Analytics expects steel demand from the infrastructure sector to pick up over the second half of the year and offset any slowdown in property construction.