China’s Steel Inventories Remain at All-time Highs
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Following its decision to freeze prices in March, China’s Baosteel has chosen to cut domestic prices in April. As of early-March, inventories look quite high for both the steel distribution market and firms. While expectations towards normalization in downstream industries and economic stimulus plans should enable a temporary rebound in steel prices, the strength and sustainability of any such rebound is likely to prove weak.
Baosteel cuts domestic April prices, citing high inventory levels relative to demand
China’s Baosteel has cut its domestic April prices for HR and CR by RMB50/ton and RMB100/ton, respectively, while leaving the price of plate untouched. China’s steel distribution inventories have reached 25.3mn tons (+36.6% y-y: 3.5 days), with company inventories totaling 20.49mn tons (+43.5% y-y: 2.28 days). Baosteel cited delays in downstream industry demand as its justification for the price cuts. For reference, Baosteel chose to freeze domestic prices in March, believing that while Covid-19 may affect the steel market in the short term, related negatives are unlikely to persist throughout the year.
Although Baosteel expects distribution inventories to begin dwindling in April, it remains cautious about predicting the exact timing of steel inventory normalization in the distribution market or at manufacturers. Meanwhile, the company has stated that it will likely take some time before steel demand recovers in earnest.
Steel prices to see temporary rebound on downstream industry normalization and policy expectations
Prior to the outbreak of Covid-19, POSCO and Hyundai Steel raised domestic prices for HR and plate. However, negotiations regarding price hikes with companies in downstream industries (automobile, shipbuilding, home appliance, etc) have failed to progress due to growing concerns towards economic recession and the spread of Covid-19. With: 1) China’s steel inventories remaining at all-time highs, and thus weighing on steel prices; and 2) global economic recession fears mounting, Korean steel makers should be hard-pressed to raise product prices. We note that following relatively strong prices in January, China’s steel export prices began falling in February. Compared with late-January prices, export prices of HR and rebar each fell 7.0% in early March—another negative for domestic steel prices.
In the near term, however, we expect to see a temporary rebound in China’s steel prices. According to a survey of the All-China Federation of Industry and Commerce, the actual utilization rate of China’s manufacturing industry is recovering gradually, reaching 67.17% (+36.4%p w-w) on Feb 28. In addition, if further stimulus packages are announced at April’s Two Sessions, expectations for policy will likely be reflected in steel prices. Meanwhile, raw material prices will continue to represent an important variable determining steelmakers’ profitability, which will likely be tough to improve, as the price of iron ore (China’s Australian imports, CFR) remains around US$80~90/ton despite the Covid-19 crisis.
NH Investment & Securities