China’s steel industry will improve as supply is constrained by fewer capacity additions, closing of polluting plants and a strong export outlook, according to Argonaut Securities (Asia) Ltd.
The world’s largest steel producer will also see demand accelerate in the longer term on the back of the country’s fiscal stimulus and monetary easing, Helen Lau, a Hong Kong-based analyst, said in a report e-mailed Tuesday.
Spot prices of rebar, used mostly in construction, have fallen to a 12-year low as demand cooled amid oversupply and a property slump in China, which produces about half the world’s steel. About 35 percent of China’s steel demand is related to housing and real estate, Goldman Sachs Group Inc. estimates. The Chinese market will swing to a supply deficit this year, with the gap widening next year through 2020, according to Lau.
“The worst in China’s steel sector is over,” Lau wrote in the report. The industry “has reached an inflection point on the back of an improving supply and demand outlook. Demand recovery, albeit lackluster over the short term, will accelerate on the back of ongoing fiscal stimulus and monetary easing policies.”
China has sought to boost infrastructure spending and cut interest rates to spur growth in the world’s second-biggest economy as Premier Li Keqiang strives to meet the nation’s 2015 growth target of about 7 percent.
Prices of steel reinforcement bar, or rebar, will rise 5.7 percent to 2,650 yuan a metric ton next year and 7.5 percent to 2,850 yuan in 2017, while iron ore prices will rebound 18 percent next year and remain unchanged in 2017, according to Lau. Spot rebar is down 16 percent this year to 2,340 yuan Tuesday, while futures have fallen 10 percent to 2,337 yuan.
Record Exports
China produced and exported a record amount of steel last year as mills sought buyers for the oversupply amid weaker local demand. The country’s economic slowdown coincided with a global surge of low-cost iron ore production that pushed down the price of the raw material to a 10-year low in April.
Steel exports will remain strong due to pricing competitiveness and economic recovery in destination countries, said Lau. Outbound shipments in May surged to a four-month high of about 9.2 million tons as oversupply and better external demand spurred mills to ship a surplus overseas.
Iron ore imports last month dropped 12 percent from April to 70.87 million tons, according to customs data. Adjusted for the number of days in the month, the imports in May were at the slowest pace since November.
Source: Bloomberg
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