China’s steel demand to slow on weaker construction trends – NAB

Research Team at NAB, notes that the iron ore markets commenced a second rally for the year in late June – with prices (for 62% ore landed in China) pushing up from US$50 a tonne to around US$60 a tonne by mid-August (a more modest peak than the previous one recorded in late April).

Key Quotes

“This rally occurred despite rising Chinese ore stocks – which have exceeded 100 million tonnes since the start of this rally (up almost 29% from the same time last year). Since the mid-August peak, spot prices have eased – falling back into the mid-US$50 range.

On the demand side, China remains the key market for steel consumption – in 2015, it accounted for almost 45% of global consumption. That said, consumption trends have softened since 2013. For the first eight months of 2016, China’s apparent consumption fell by 1.2% yoy, having fallen strongly across the first quarter before subsequently recovering to neutral levels.

A weakening trend in China’s construction sector is likely to soften steel consumption in coming months. New construction starts surged between March and June – fuelled by credit growth – but have since slowed. In August, new construction starts rose by just 3.3% yoy, down from 27% yoy growth in March. We anticipate this weakening trend to continue, as we have previously argued that the construction boom was unsustainable.

Global steel production fell in the first eight months of 2016 – down 0.7% yoy to 1.07 billion tonnes. The declines have been larger outside of China – with non-Chinese production falling by 1.6% yoy over this period. Sizable production cuts in the United Kingdom, Brazil and France were partially offset by increases in India, Ukraine and Turkey.

China accounted for just over half of global production in the first eight months of 2016 – at around 536 million tonnes. World Steel data suggests that this represents a marginal increase in output (up 0.2% yoy), while Chinese official data reports a modest fall (down 1.2% yoy).

The profitability of Chinese steel mills has improved since late 2015 – when domestic steel prices hit record lows (stretching back to 1997) – with steel prices trading between RMB 2500 and RMB 3000 since mid-May. That said, with iron ore and (particularly) coal prices trending higher since this time, profitability has only recovered to the lower bounds of the trend between 2009 and 2014 – suggesting continued challenges for Chinese producers.”