China's ferrous market has been seeing plenty of volatility in steel and raw materials prices since the start of 2018. Market participants are unclear about the near-term price direction, but Q1 is often atypical of the year as a whole.
In this video, Paul Bartholomew, S&P Global Platts Senior Managing Editor for Steel Policies and Industries, explains how the winter production cuts in China are affecting the market so far, and what the country's "quality over quantity" focus means for the market this year.
Will the Chinese steel market be softer in 2018?
By Paul Bartholomew, Senior Managing Editor, Steel Policy and Industries
Welcome to the Snapshot, a series that examines the forces shaping and driving global commodity markets today.
Well, January is racing away and it’s proving difficult to get a handle on ferrous markets in China. We’ve already seen plenty of volatility in steel, iron ore and coking coal prices. Market participants in China are as unclear as the rest of us about the near-term price direction. But in general, they are tending towards the bearish side – as can be seen in the low reading in the latest S&P Global Platts China Steel Sentiment Index.
The January-March quarter tends to be atypical of the year as a whole. Iron ore exports are lower due to seasonal factors in Australia and Brazil - and the long Chinese New Year break occurs in the quarter. In 2017, sentiment was extremely bullish. If anything, prices overshot and then came hurtling down from the end of March.
2018 outlook complicated by China’s winter cuts
This year, the market outlook situation is complicated by China’s winter curtailments on steel production and on other industrial activity such as construction. Also Chinese New Year is much later than normal, potentially pushing back the restocking cycle.
To date, the winter output cuts have had relatively little impact. Domestic steel prices – often driven by futures sentiment – carried on climbing in late 2017.
The decoupling of steel and iron ore prices indicates there could be room for weaker domestic steel prices in the current quarter. Both steel and iron ore inventories have been climbing in recent weeks which could add to the pressure on prices. Some market players expect a spring steel price rebound.
Steel prices reached record highs in 2017
Looking further out into 2018, it is difficult to see how the Chinese steel market can be any stronger than last year. However, the market thought the same thing a year ago, and look what happened. Steel prices reached record highs, and crude steel production was much stronger than expected.
That said, nobody envisaged that China would eliminate 140 million mt/year of “illegal” steel capacity that the market didn’t really know about. This added more impetus to domestic steel prices and contributed to a 31% drop in finished steel exports in 2017.
Also, there was a lot more liquidity in China than had been anticipated. The Chinese government likely wanted the economy to be performing well ahead of the important party congress in October.
Now the leadership is even stronger it could be more sanguine about the pace of economic growth this year. The message coming out of China is that ‘quality rather than quantity’ is the major focus. This is akin to the large miner’s ‘value over volume’ mantra. The age of excess is behind us, it appears. In terms of steel, we expect Chinese crude steel production to dip by less than 1% to around 850 million mt.
Already indicators show that liquidity is being tightened. This could result in a slowdown in new construction and infrastructure projects – particularly over the second half of 2018.
Manufacturing remains in positive territory but is a bit patchy. So all-in-all China’s steel market seems set to be more subdued this year. But that said, let’s not be surprised by China’s ability to surprise.
Until next time on the snapshot, we’ll keep an eye on the market.