Domestic Steel Price Decline Continues
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Amid sluggish real economic indicators, the Chinese government has been implementing economic stimulus measures. We adhere to our outlook of a rebound in steel prices over September~October, although the possibility of a sustained uptrend is limited, as concerns towards economic recession persist.
China’s steel prices rebound at end-July, then turn flat
After rebounding over late-July~early-August, China’s domestic steel prices have remained flat since mid-August. On Aug 8, the price of HR climbed 8.8% to RMB4,198/ton, after hitting a low of RMB3,860/ton (national average) on Jul 15. Over the same period, prices for CR, heavy plate, and rebar also rebounded by 6.5%, 6.2%, and 8.7%, respectively. On Aug 23, the price of HR products remained flat at RMB4,123/ton.
China’s steel price rebound at end-July was driven by: 1) the easing of monetary tightening by the US Federal Reserve; and 2) expectations for China’s real estate funds. Also playing a role were a decrease in steel inventories, decline in crude steel production, and the purchase of low-priced steel products on the demand side ahead of the September~October peak season.
We expect a rebound in steel prices over September~October driven by China’s increased infrastructure investment and seasonal demand. However, improvement in downstream industry indicators (including real estate) in China is being delayed as of late, and the re-spreading of Covid-19 in some regions presents an additional risk factor.
Stabilized raw material prices and improved economic indicators to be keys to steel company earnings
On Aug 23, the iron ore price stabilized at US$100.9/ton (Australian/China import/61.5%/CFR), having remained in the range of US$95~115/ton since July. By quarter, the average iron ore price fell from US$139.5/ton in 1Q22 and US$137.2/ton in 2Q22 to US$105.6/ton in 3Q22 (July~present). Meanwhile, the price of hard coking coal stood at US$271/ton, having dropped sharply from US$671/ton on Mar 14, with the average quarterly price sliding from US$484.5/ton in 1Q22 and US$450.2/ton in 2Q22 to US$236.7/ton in 3Q22 (July~present). Although raw material prices are stabilizing, it is judged that profitability improvement at steelmakers stemming from the raw material price decline will be limited.
To stimulate the economy, the People’s Bank of China is cutting the one-year loan prime rate (LPR) by 0.05%p and five-year rate by 0.15%p. It has also been reported that a special loan (RMB200bn) will be offered to real estate developers. Meanwhile, the floor area of new real estate construction starts in China over January to July fell 36.1% y-y. Against this backdrop, despite the bank’s stimulus measures, improvement in real economic indicators remains necessary to firm up investment sentiment.
In the domestic steel market, prices continue to tumble. On Aug 22, the domestic HR distribution price fell to W1mn/ton on a seventh consecutive week of decrease. Looking at imports, the price dropped to W930,000/ton (-8.9% m-m). With Chinese steelmakers offering HR export prices of US$630/ton (CFR), further domestic HR price decline is likely.