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Bloomberg's eyes:China’s `bubble’ steel prices

China’s `bubble’ steel prices seen holding advance, for now

Posted on 10 August 2017

Source: Bloomberg

Chinese steel prices should hold to four-year highs even as levels look stretched, given state efforts to maintain stability before a ruling party meeting in the autumn and longer-term plans to cut output.

“We see this as a bubble,said Kirill Chuyko, a strategist at BCS Global Markets in Moscow. “But it is likely to remain for another couple of months as the Chinese stimulus should remain fully on until the China National Congress in the beginning of the fourth quarter.”

The Communist Party congress, held every five years, will be led by Chinese President Xi Jinping as the country tries to sustain economic expansion, at the same time as reining in stimulus that’s left it overly reliant on manufacturing for growth.

The spur to demand from booming local factories and construction has pushed up Chinese steel prices and led to a sharp drop in exports.

Overseas sales sank 32% in July from a year earlier, the lowest level for the month since 2013, according to customs data released on Tuesday. In the first seven months, shipments fell 29%.

The decline in Chinese exports is benefiting international producers. ArcelorMittal, the biggest steelmaker, reported its best six months’ profit in half a decade last month.

At the same time, Chinese producers are gaining from surging margins between steel prices and costs such as iron ore and coking coal.

The shift, along with plans by China to shutter excess capacity, has blunted accusations by U.S. politicians including President Donald Trump that a flood of cheap Chinese steel is destroying jobs for steelworkers abroad.

China plans to close 50 million metric tons of steel capacity this year and as much as 150 million tons in the five years ending 2020 as it seeks to make the industry less dependent on the state.

“While Chinese steel margins appear unsustainably high, mounting supply restrictions may prolong the current upcycle to the benefit of global steelmakers,” said Seth Rosenfeld, an analyst at Jefferies International.

“Chinese supply side reform, leading to lower exports at higher prices, has done far more to buoy global steel markets than Trump or any other Western politician could achieve.”

Aditya Mittal, chief financial officer of ArcelorMittal, said last month that steel margins have exceeded normal ranges and may fall back.

“The number we’re seeing today has some risks,” he said. “What if the demand growth does continue as strongly in 2018 and 2019? That is the most significant risk that exists.”

China’s steel markets softened on Thursday, with reinforcement bar on the Shanghai Futures Exchange falling 1% to 3,967 yuan a ton by 10:09 a.m. The product used in construction is still up 38% this year

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