JEFFERIES: Traders, not builders, are boosting the steel price

Chinese steel prices are surging back from lows but it has little to do with construction demand for the real thing.

Builders might not be buying steel, but traders are, according to analysts at Jefferies. This exl pains while the steel price has sprung back 20% from its low in December and cement prices have remained in the doldrums.

Here’s the chart from Jefferies that shows steel prices bouncing back:

Jefferies puts this down to the cut in the reserve requirement ratio — a benchmark figure that decides how much money banks can lend — leading to steel traders taking on debt to make bets on the price of the metal.

Here’s Jefferies (emphasis ours):

After the Chinese New Year, cement demand has been recovering very slowly with some cities continuing to report a price fall. Underlying demand for construction steel must have been weak as well. What is causing steel price hike? We think this is mainly due to speculative demand.

Steel is a much more financialized product than cement. We think recent RRR which allow the steel traders to lever up again, and the low traders’ inventory back in January have been the main causes of the hike.

But what goes up must come down. As steel mills pump out more metal to take advantage of the rise in prices, so the additional supply will drive them down again:

However, we note that steel traders’ inventories had spiked quickly in February and have reached 12.6mn tons now as steel mills resumed production on profitability improvement. According to MySteel, utilization rate of steel mills in China increased by 3pts to about 82% last week.

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