Posted on 15 Jun 2022
China’s crude steel output increases rapidly in the short term
The average daily crude steel output of member mills of China Iron and Steel Association rose 1.5% YoY to 2.32mn tonnes as of May 31, up 12.8% from 2.06mn tonnes recorded in March when Shanghai was under strict lockdown measures. The steelmakers’ crude steel production has returned to normal levels with the easing of COVID-19 restrictions. If pandemic restrictions are further relaxed in China, crude steel output may post a steep upturn in the near term.
China’s steel inventories remain higher than past average levels
Amid rapid recovery in crude steel output, China’s steel inventories edged down from a month ago. According to data compiled by SteelHome consultancy, combined steel inventories recorded 16.41mn tonnes as of June 9, down roughly 2% from a month ago, but slightly up from late May and early June.
Given the recent increases in crude steel output and steel inventories in China, we find market conditions somewhat gloomy in view of: 1) inventories sold at a relatively slower pace, unlike in the past when inventories decreased rapidly during the peak season; and 2) larger inventories in absolute terms vs. 2020 and 2021 levels. Considering inventory levels are affected by production and shipments, the higher-than-usual levels of steel inventories are attributable to not only fast increases in crude steel output, but also sluggish recovery in demand. Despite rising expectations for China’s economic stimulus, an actual upturn in market conditions has yet to be witnessed.
Effects of China’s economic stimulus to be felt in earnest from 2H22
The price spread of hot-rolled coil (HRC) in China dropped to the USD50/tonne levels due to sluggish market conditions. Investors may feel reluctant to buy steel stocks under current situations. However, we expect to see improvements in market conditions and share performance in 2H22, boosted by full-fledged effects of China’s economic stimulus. Steel demand from the construction sector is projected to rebound on the easing of real estate regulations and larger investment in infrastructure. We also forecast demand for steel used to make cars and home appliances to post an upturn backed by purchase subsidies and consumption vouchers. A sharp rise in crude steel output may negatively affect supply/demand conditions in the short term, but we believe supply and demand should return to normal levels upon the recovery in demand.
Meanwhile, domestic market sentiment is currently weighed down by concerns over a drop in shipments following the general strike by the Cargo Truckers Solidarity union. The strike does not appear to have a significant impact on steelmakers’ earnings for now, but can partly drag down earnings in2Q-3Q if it continues for a long time. We maintain our OVERWEIGHT view on the steel/nonferrous metals sector in view of attractive valuations (lower PBR compared to ROE) and high dividend yield. Expectations are still high for ASP hikes to be carried out in 2H22, with prices of coking coal remaining at high levels and those of iron ore rising in 1H22.
Source:Business Korea
