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China just announced another $4 billion in quotas for
infrastructure spending.
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Initial reports suggest that the move may give steel and
iron ore prices some upward momentum.
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Steel industry experts are hopeful that steel output will
increase in September as the country starts to respond to the government
stimulus efforts
A
few days ago, China’s State Council announced more stimulus policies. The new
measures included an additional 300 billion yuan ($44 billion) in quotas for
infrastructure spending and investments by banks. This was in addition to the
300 billion yuan announced at June-end. However, the only real question
regarding the stimuli is looking at everything happening with steel and iron
ore prices: will it help? Most initial reports suggest that the move may give impetus
to steel and iron ore off-take, both of which are in a months-long slump.
However, other reports believe these new stimulus actions might not achieve
their goals. More specifically, they won’t generate a renewed interest in
construction activity in China. As a result, there won’t be much (if any) of a
positive impact on the steel sector.
In
2021, China produced 1.033 billion tons of crude steel. It was the first
decline since 2016. Thus far, in 2022, national steel production is down 6.4%
year-on-year. The China Metallurgical Industry Planning and Research Institute
predicted this at the beginning of the year, stating that China’s 2022 output
would slow to 1.017 billion tons. This represents a 1.5% decrease from the year
before.
Steel and Iron Ore Prices Bouncing Back
Following
the recent stimuli announcement, a Bloomberg report stated that China’s raw materials prices, including
iron ore prices, had officially steadied. This came after factory activity shrank
less than expected in August. Meanwhile, the purchasing managers’ index for
steel stayed in contraction, and the pace of its decline narrowed sharply.
Steel
industry experts are hopeful that steel output will increase in September as
the country starts to respond to the government stimulus efforts, which will
hopefully aid iron ore prices. Some Chinese steel mills have already signaled
that production is rising and profit margins are back in positive territory.
Related: China Steps Up LNG Sales To Europe As Prices
Soar
Indeed,
thanks to the June and September stimuli packages, iron ore prices and some
steel products are rebounding. For instance, Shanghai steel rebar initiated a
recovery recovering its lowest close this year, moving from 3,704 yuan
($539) a ton on July 15 to 4,078 yuan on Aug. 26. Profit margins at steel mills,
which were negative in July, returned to positive territory as well. S&P
Global Commodity Insights reported a profit of about $50 a ton on rebar in
August.
Rebar Also Struggling
Rebar
inventories have also dropped. This is also a sign of activity picking up. After
all, inventories had gone down in the last nine weeks. They are now about two
million tons below the 7.13 million recorded during the same week in 2021.
Earlier
this week, iron ore futures, too, rebounded. The most-traded January iron ore
on China’s Dalian Commodity Exchange ended daytime trade 4% higher at 692 yuan
($99.85) a ton for iron ore prices. On the Singapore Exchange, the iron ore
October contract went up 4.5% to $98.75 a ton. These are promising numbers, but
it will take time to see the true and full effect of the ongoing
stimulus.