Chinese steel and iron ore markets outlook H2 2017

Posted on 12 July 2017

Source: Hellenic Shipping News

Chinese steel mills have been enjoying strong margins as they continue to benefit from the government’s removal of lower quality induction furnaces. Long steel has also been getting a boost from the robust housing market. But how long will these positive market conditions last? Senior Managing Editor Paul Bartholomew explores the prospects for China’s steel and iron ore markets for the rest of 2017.

So we’re halfway through the year – and it’s been another period of volatility which is reflected in the Platts China Steel Sentiment Index.

In fact, the market has generally been stronger than the sentiment index would indicate – particularly for long steel products such as rebar which reversed a historic trend by overtaking hot rolled coil prices in late February.

The major story so far this year has been the closure of 100 million mt/year or so of induction furnace capacity in China.

The removal has freed up market share for rebar and enabled more efficient producers to lift capacity utilization rates. As a result, rebar producers are enjoying some of the best margins in almost a decade and not surprisingly are churning out as much steel as possible. This has contributed to the 4.4% year-on-year lift in steel production over January-May.

The market for long steel has also been helped by a robust housing market – despite a plethora of tightening policies – and also low steel inventories.

These positive conditions and the effects of the induction furnace closures are expected to persist into the third quarter. This will see Chinese steelmakers continue to largely focus on domestic rather than export customers, which should help support global steel prices.

June manufacturing data pointed to an improvement in that sector, which should provide some support to flat steel prices. The hotter summer months in China are typically a good time for sales of white goods, such as air conditioners.

From a macro perspective, the Chinese government will want to keep the economy ticking along nicely ahead of the all-important 19th party congress in Beijing in October. There are also some indications that China may ease back on tightening regulations in the second half. All-in-all, there should be enough stimulus to maintain current steel market conditions.

Iron ore prices, meanwhile, hung onto the coat tails of soaring steel prices in the first quarter before decoupling and falling back to earth with a bang. Prices have since recovered slightly to the low $60/mt range but plentiful supply and high port stocks means iron ore prices are more likely to be determined again by fundamentals rather than sentiment.

Whether prices come under more pressure in the second half will depend on the ramp up rate at Vale’s new S11D project in Brazil.

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