Analysis: Will the winter cut hit China's steel market hard?

Houston — Platts MVS Research: Winter is coming, and so are the large-scale winter season production cuts that officially commenced in large steelmaking areas across northern China on November 15. However, S&P Global Platts Analytics anticipates that the cuts will not significantly dampen steel market activity.아직 가입하지 않으셨나요?일일 이메일 알림과 구독자 노트를 받고 이용 경험을 내게 맞게 설정하세요.지금 가입하세요In our recent article "A breath of fresh(er) air -- China's steel suspensions", we discussed how both steel demand and supply would see a dramatic fall in the upcoming period. But a fall in demand does not necessarily mean that steel prices will be hit hard, given current market fundamentals.CHANGING DYNAMICS AND MARKET PARTICIPANT EXPECTATIONSExpectations that China would launch massive production restrictions in the final quarter of this year and in Q1 2018 hit the ferrous markets hard in late September. However, as more policy detail has emerged, market participants realized the situation was not as parlous as previously believed. The chart demonstrates how the forward curve for Dalian Commodity Exchange iron ore derivatives has responded to developments over recent months. The chart illustrates a structural inverse of the iron ore futures market, which has moved into contango from backwardation. Also, the restriction policy released by local authorities in Tangshan is actually quite flexible. The policy allows potential room for more steel production if local mills provide energy/heating for the local community.STEEL PRODUCTS HEADING SOUTHIt has been observed that mills are distributing more of their products into the southern market, which in our view could partially offset the fall in steel demand in northern China, where restrictions around construction activity are also in place. The chart showing changing rebar inventories in Guangzhou, a major steel trading market in south China, demonstrates that steel inventories in the area saw a dramatic increase in late September and early October. This is not something typically seen when compared to previous years. In light of the Central Government's policy reduce steelmaking capacity, the major reason for such a soar is unlikely to be a rise in local steel production, but rather the result of rising deliveries from the north.MARKET WILL ANTICIPATE A BIG Q2 REBOUNDAnother reason why steel prices may not experience too hard a landing is because, despite the suspension of construction in northern China during the winter season, demand for rebar products will definitely see a dramatic increase next year, most likely in early Q2 when the suspensions have been removed. In anticipation of a big demand (and price) increase, Platts expects rebar orders to remain steady this winter, and steel traders will start to build inventories at some point in the near future.--Steve Xi,