Questions arise over how much further China’s steel price rally can last

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Shanghai steel futures extended gains to hit an eight-week high on Monday, according to a post on Nasdaq.com. Futures made further gains overnight, according to MetalMiner’s Insights platform.

Rebar and hot rolled coil both hit peaks last seen on May 19, when the market last spiked only to crash after dire warnings from Beijing about speculative activity and the threat of action against excessive rises in commodity prices.

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Chinese steel price fall off, then bounce back

China steel plant

gui yong nian/Adobe Stock

Since prices came off they have been making a steady recovery. Beijing’s pressure to curb excess production capacity as part of wider environmental targets raises the prospect of material shortages in the face of still robust demand.

 

Late last week, the People’s Bank of China announced it would cut the bank’s reserve requirement ratio by 50 basis points, effective from July 15. It would release around 1 trillion yuan to underpin an economic recovery that Nasdaq reports is starting to lose momentum.

The move supported further price rises. However, in reality, it would take months for the PBOC’s relaxation of reserve requirements to filter though into any increase in construction activity and, hence, demand.

Domestic demand

Despite firm finished steel prices, domestic demand appears steady at best.

Imports of scrap and billets have fallen in Q2 over Q1. Domestic Chinese prices are lower than neighboring markets, such as Japan.

The expectation is that both demand for imported material and domestic steel prices could see a seasonal lull in Q3. That is, unless Beijing renews its focus on curbing capacity more overtly.

A toning down of rhetoric from Beijing has detracted from the narrative of finished steel scarcity that spurred prices earlier. So, the authorities may be careful about the application of its policy in the second half of the year to avoid boosting steel prices.

Delta variant impact

A recent Financial Times post, however, suggests growing fears about the spread of the Delta coronavirus variant could further weigh on commodity prices this summer.

Commodities took a dip this week as fears spread about the threat of renewed lockdowns in many countries. Vaccinations and recovery are well underway in the United States. However, a more transmissible variant poses a significant danger in developing countries, where vaccinations rates are low. Even in Europe, there are fears restrictions may have to be reintroduced over the summer if numbers do not level off soon.

China is not expected to see a return to lockdowns. However, a drop in demand for Chinese exports could dampen demand in the second half.

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