As much as China would have the rest of the world believe it has the coronavirus beat, both the authorities and the economy are acutely sensitive to the possibility of a resurgence.
The recent reintroduction of a lockdown in Beijing — following new cases in Beijing’s biggest wholesale market, which infected at least 236 people — has spooked the markets.
Beijing set in place a partial lockdown, closing schools and putting housing compounds under strict control while thousands of flights were canceled, Bloomberg reported this week.
Stocks wobbled and Chinese rebar prices drifted lower as investors worried about the risk of a surplus if construction was hit. Anxiety in China over steel consumption had already been surfacing, as the onset of the wet season in southern provinces slowed construction activity.
Steel prices and the cost of steel inputs, such as iron ore and coking coal, have all weakened in recent days. Rebar futures may well have topped out what had been a 10% gain in the second quarter. Reuters reported rebar prices had been lifted by solid demand from an infrastructure-led recovery program that is nowhere near as large as the post-financial crisis stimulus but still seen as being sufficient to boost steel demand.
Mills have been running at capacity and demand had been robust, but the rate of decline in rebar inventory has been slowing for three weeks now — a sign that demand is not keeping up.
Hot-rolled steel prices have also been showing weakness of late, Reuters commented, suggesting the economic recovery in China may not be as strong as previously thought or that steel mills’ enthusiastic resumption of full output may be overoptimistic with so much of the rest of the world still struggling with getting their economies back to work.
Our expectation is Beijing will have this recent outbreak under control quickly and the partial lockdown will be lifted in July. Construction remains solid, if unspectacular, and while steel producers would be advised to manage output to demand, the reality is if they can make money, they will run at capacity.
Inventory is therefore likely to become more plentiful. However, with the summer construction season in full swing, a significant fall in China’s construction steel prices is unlikely. Temporary dips are possible, but the sector has been written off too often in the past only to surprise to the upside for us to repeat that mistake again.