China’s steel industry likely to see cutbacks as stocks rise amid coronavirus crisis

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China
Zerophoto/Adobe Stock

Not surprisingly, the steel sector in China is one of many going through acute uncertainty at the moment over fears the coronavirus spreading from Wuhan is still not under control.

As a result, it is becoming increasingly apparent steel demand is going to be down for some time to come.

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The popular wisdom was this virus would peak in a week or so and a falling rate of infection would encourage relaxation of travel bans and some return to normality.

Steel mills have kept producing in the expectation the bounce-back would be dramatic, but there are signs a combination of an uncertain demand outlook and falling prices compressing margins may hasten steel mill cutbacks before the month is out.

Bloomberg quoted Wang Jianhua, chief steel analyst at the consultancy MySteel, who said, “Demand for construction steel is literally almost at a standstill.”

“The peak of the fundamental pressures has yet to come,” Wang added. “While China is beginning to return to work, the rise in steel demand, activity is very limited, and it may take one to two weeks to even see a start in recovery.”

That was before the announcement late last week the number of infections is actually much higher than previously announced, raising suggestions the authorities may have been misdiagnosing or, worse, misreporting the number of cases.

The report in the Huffington Post stated health officials in China’s Hubei Province — the epicenter of the outbreak of a new coronavirus — reported the largest single-day infection rate to date, identifying 14,840 new cases in the region and 242 more deaths.

The construction industry has arguably been the hardest hit, with workers only slowly returning to work and buyers of new properties nowhere to be seen.

Rebar inventories — which typically show a steep seasonal build-up at this time of year, Bloomberg reports — more than doubled in January. They are now at the highest level for early February since 2012, with overall steel product inventories held by traders in China at the highest level since March 2019 at 16.33 million tonnes.

Spot rebar prices have, not surprisingly, plunged nearly 10% between Jan. 20 and Feb. 3. While they have steadied in recent days, sentiment is shaky.

Traders quoted by Reuters said, “There’s no construction activity … Who would buy at this time?” These traders said they haven’t bought any steel products recently and expect their post-holiday restocking to be postponed until the virus is under control.

Everyone knows Beijing will hit the gas with significant stimulus measures once they feel it is safe to do so. The bounce-back could be dramatic, but it isn’t going to happen until they are confident the spread of the virus is under control. Recent news of nearly 15,000 “new cases” will not encourage them to step on the pedal; clearly, matters are not under control.

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Economists had predicted earlier this month that growth would be in the region of 4-5% this quarter, but this could fall to near-zero growth if the current measures extend into March.

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