- Prices for steel, iron ore and coking coal have tumbled since the start of March.
- While some blame the introduction of tariffs on US steel imports, Macquarie Bank thinks it’s been driven by concern about the outlook for Chinese steel demand.
- It expects recent trends to reverse in the weeks ahead as Chinese construction activity ramps up.
Sentiment towards Chinese steel demand has taken a big hit since the start of March, leading to large and steep declines in commodities such as iron ore and coking coal.
Data showing steel inventories held by Chinese traders spiked by the most since 2013 in early March, coming at a time when inventories are usually being run down as construction activity ramps up as the winter thaw subsides, rattled investor confidence, creating doubts over the outlook for demand.
Even with a bounce in steel, iron ore and coking coal spot and futures markets on Wednesday following the release of stronger-than-expected Chinese industrial output and fixed asset investment at the beginning of the year, markets have not gone on with that move today, underlining that sentiment still remains fragile.
However, analysts at Macquarie Bank aren’t concerned by the recent build in steel inventories.
It thinks the recent increase largely reflects temporary factors that will reverse in the weeks ahead.
“We are not too concerned about what seems to be a delayed pick-up in Chinese steel demand for the following two reasons,” it says.
“Industry and construction activity have remained subdued in the post-China New Year period due to the National People’s Congress (NPC) in Beijing, which has put the brakes on economic output to keep pollution at a minimum and reduce the risk of safety accidents.
“[Secondly], China New Year came later than usual this year, and China restocked more aggressively than usual during the holiday.
“For iron ore, for example, imports lifted 12% above the 12-month rolling average for December to January, and the industry is clearly working through that material now.”
Macquarie expects demand for construction steel to pickup at some point over the next two weeks, resulting in a decline in steel inventories which it says should provide some support to prices.
Further up the supply chain, it is not concerned about a recent lift in Chinese iron ore port inventories to fresh record highs, noting not only is there little relationship between them and prices, but also demand should start to pick up as Chinese construction activity begins to ramps up.
“We are not too worried for now given that we are entering a seasonally strong period for Chinese crude steel production,” the bank says.
“A correction in [steel mill] margins and a pullback in Chinese crude steel production are required to deliver a destocking cycle at Chinese ports, the risk of which is higher after April in our view.”