China’s Steel Prices to Rebound in 2H21
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
We see strong chances that Chinese steel prices will rebound in 2H21, re-taking the previous high levels as a top. Inflation, steel demand increase, and iron ore prices are all expected to support such recovery. However, the intensity of the Chinese government’s intervention in the commodity market remains as a variable. We maintain Buy ratings on POSCO and Hyundai Steel, both of which have suffered share price adjustments due to the recent plunge in China’s steel prices.
China’s steel prices to rebound in 2H21
Steel prices have plummeted since May on the Chinese government’s intervention in the commodity market. China’s domestic HR price (nationwide average) hit an all-time high of RMB6,800/ton on May 12. As of Jun 8, the price came to RMB5,584/ton, down 17.9% from last month’s high. The prices of CR, steel plate, and rebar also plunged by 14.1%, 16.5%, and 18.4%, respectively, while the prices of China’s HR exports and Southeast Asia’s HR for domestic consumption fell 10.0% and 11.4%, respectively.
In 2H21, China’s steel prices are expected to rebound within a limited range, backed by rising inflation amid economic recovery, robust seasonal demand for steel products over September~October, and strong iron ore prices (still above the US$200/ton level despite Chinese government intervention). However, given that the Chinese government will likely adhere to its stance regarding commodity price stabilization, the top of the 2H21 steel price rebound will likely come in around the 1H21 peak level. Rather than the extent of price rebound, we believe it is important that historical high steel price levels are maintained, and that steel demand and economic indicators remain favorable.
Environment to be different from past tapering period of 2013~2014
Amid an economic recovery and inflationary environment, tapering has become the talk of the financial market. We note that after mentioning tapering in May 2013, the Fed cut asset purchases from January through October 2014. During that period, China’s domestic HR price fell 15.1%, and POSCO shares slid 5.8%. It was a time of narrowing GDP growth for China, with the figure coming to 7.4% in 2014, the lowest level since 1990. In 2014, PPI for China and the US stood at -3~-1% and 1~2%, respectively, and the iron ore price dropped 36.3%.
Despite the Chinese government’s intervention in the commodity market, the price of iron ore as of Jun 8 remained high at US$208.4/ton (down 10.2% from the May peak)—a factor which should help steel prices to recover. China’s May PPI came to 9.0% and the US’s April PPI arrived at 6.2% amid persisting inflation concerns. Meanwhile, the World Steel Association (WSA) predicts that global steel consumption will expand by 5.8% in 2021 (with China, the US, and the EU seeing growth of 3.0%, 8.1%, and 10.2%, respectively).