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Chinese short-term steel demand will not be enough to offset weak property market: Sucden

Longer-term demand for steel in China is likely to remain strong, but in the short term, there will not to be enough demand to offset the nation's weak property market, according to the Sucden Financial quarterly metals report presentation held Jan. 19.

"What we're looking at is a softer demand outlook once we get through the initial steel resumption following the Blue Skies Initiative [to curb pollution] and the Winter Olympics," Sucden Head of Research Geordie Wilkes said in the virtual presentation.

"We do see some steel capacity coming back online after the [Lunar New Year] and then again another tranche coming back in after the Winter Olympics ... looking at that wider spectrum, the property sector is clearly one of those red flags or downside risks to steel demand," he added.

However, longer-term demand was expected to be lifted by the green economy and global decarbonization requirements, in which steel would be involved in a number of sectors, particularly in China.

Wilkes pointed out that, despite a lot of capacity in China being offline for a large proportion of 2021, steel production was only down a few percent, "which goes to shows how much capacity and how much steel they [China] produced in the first half of the year."

The World Steel Association has not yet released its December crude steel production data, but China's crude steel production from January through November 2021 fell 2.6% from the corresponding months of 2020 to 944.8 million mt.

Global crude steel output for the 11-month period was up 4.3% year on year at 1.7 billion mt, according to worldsteel

Margins for hot-rolled coil and rebar looked stronger, Wilkes said, which would likely result in stronger output for those products in in China the medium term.

"I think after the Olympics, you'll probably push it back to 2.6 million mt/day of increased steel ... before that you're probably going to remain low at around 2.4 million mt/day and then push higher as steel mills' production starts to increase," Wilkes said.

S&P Global Platts' daily SS400 HRC 3 mm thick was assessed at $756/mt FOB China, up $3. The same grade of coil was assessed at $745/mt on a CFR Southeast Asia basis, up $7 over the same period.

"We need to see a bigger war chest from the Chinese stimulus perspective to really suggest a stronger steel consumption environment in 2022," Wilkes said, adding that he expected a relatively strong stimulus package.

"It's still relatively unclear how they're going to manage the environmental push and stimulus levels, but I think to begin with, the first part of the year will probably favor the stimulus side of things and then move back to the environmental aspects," he said.

Iron ore downside

Higher coal costs could squeeze steel margins, while there was always an upside risk to the iron ore market, although Wilkes favored the downside for the latter.

Sucden senior broker of industrial commodities Robert Montefusco said iron ore prices had looked "quite bullish" Jan. 19 on news coming out of China for the stimulus and rate cuts, with China's central bank vice governor Liu Guoqiang announcing Jan. 18 that the bank would be rolling out more policy measures to stabilize the economy.

S&P Global Platts assessed the 62% Fe Iron Ore Index at $130.20/dry mt CFR North China Jan. 19, up $2.90/dmt from Jan. 18.

"I think that's going to be a big factor on iron ore prices ... a lot of this has been restocking and the port stocks in China are relatively high right now, as well as the rains in Brazil have caused problems, so we're not had that extra supply coming over," Motefusco said.

Due to the restocking, he, however, did not see the iron ore price collapsing, despite declines to around $90/dmt seen in 2021 and no large demand being seen until the Lunar New Year or after the Olympics.

"I think there will be a lot of hedging if we spike to $140/dmt or $150/dmt... . I think the second half of the year might be a bit more interesting to see if we get to that $140/dmt or $150/dmt level," Montefusco added.

Source: S&P Platts

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