The steel price rally is going to 'fizzle out' soon

Steel prices have rallied so far in 2016, but the increase in prices could be short-lived.

A new note from BMI Research predicts that steel’s rally in the first half of this year is going to fade in the second half, driven mostly by excess capacity pushing prices lower.

The increase in prices was due mainly to Chinese demand: steel users restocking the metal, government stimulus measures in the housing market, and positive investor sentiment. Both exports and production rose significantly in June 2016, BMI notes: China’s steel exports rose 16% month-over-month, and production grew by 1.7% month-over-month.

But a slowdown in Chinese construction activity could decrease demand for steel soon — meaning that all of June’s increased production will become excess capacity.

There was a boom in China’s property market earlier in 2016, leading to an increase in real estate investment and development and boosting steel demand.

But BMI’s “core view is that this trend will begin to fizzle out towards the end of 2016,” as “housing affordability continues to worsen amid high levels of inventory.”

This combination means that this year’s rally is just going to result in an oversupplied market. BMI expects production and exports to slow down over the coming quarters, and for the price rally to come to an end.

However, BMI predicts that “prices will gradually edge higher from 2017 onwards, due to Chinese supply moderation.” Which means there’s going to be a very modest uptrend in steel prices — after they fall.

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