Rally in steel prices seasonal, won't last for long, say experts

Annalisa Jeffries, Associate Editorial Director, Platts and Paul Bloxham, HSBC in an interview to CNBC-TV18 spoke about the outlook for international steel prices. Both experts do not think the current rally is likely to sustain.

According to Jefferies, the current domestic demand for steel in China is very strong and so it is exporting less, which has aided the rally in steel prices. The domestic demand in China is expected to stay strong due to the construction season between March and May.

Bloxham is of the view that the rally is more due to seasonal factors like restocking, and fundamentals do not support the rally seen in commodities across the board. He is not yet convinced that the recent increase in steel prices would last for long.  However, he does not expect the prices to retest January 2016 lows.Below is the transcript of Annalisa Jefferies and Paul Bloxham’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18. Reema: We spoke to the head of one of the large steel companies in India, JSW Steel and they indicated that international steel prices have gone up by nearly USD 100 per tonne in the recent past. Do you believe it is sustainable and there is a possibility that international steel prices will go up from here on? Jefferies: If we look at Asia, we can see that the billet prices have been very strong this year. They are around the 1,900 yuan mark which is about USD 300 and they have increased substantially. So, the margins are good for the Chinese steel mills. What that has meant is less exports out of China which in turn has meant better prices for steel production elsewhere in the world, whether it is the US or Europe. It has improved a lot, whereas previously, people were much more concerned about exports out of China, but domestic demand in China is very good. And, we have got to remember that China, of course, is the largest producer of steel in the world. Latha: We were also given to understand that this Chinese demand was largely restocking. Can it really last? I mean, what are the kind of prevailing prices now? Is it between USD 330 and USD 350 and do you see them holding? Bloxham: We do not think that the prices will stay at their current levels. We think the rally we have seen is a bit overdone. We think it does reflect some seasonal factors, in particular some restocking in the first quarter of this year. You have seen some stabilisation in property investment numbers in China, but we are still yet to be convinced that that is going to see a particularly strong pick up in terms of demand. And we see the overall Chinese steel industry is still having a significant amount of overcapacity. The utilisation last year was only 67 percent and we think even though there are plans to cut back no some of the productive capacity, there is still more capacity coming on, planning to come online. And as that happens, we think they are going to continue to weigh on steel prices. So, in general, this is the story across the commodities complex, there has been quite a solid rally since late January in commodity prices. But across the range of commodities, we are still seeing clear signs that the fundamentals do not support a continued rally, that we have still got oversupply across a range of commodities including steel. Latha: I take your point on continued rally, but my question was, will this price be maintained? At the moment, landed price in India is about USD 370 per tonne. Does that hold? Bloxham: We think that the rally you have seen up to that level is still a bit overdone on the back of that story, on the back of the fact that it is being driven by restocking, it is being driven seasonality and we still see that there is significant oversupply in the global markets. So, we think that is going to eventually see that those prices will come down from where they are. Reema: So, what would be the average steel prices you would expect in the next three months, six months as well as by the end of 2016? Bloxham: We have in mind prices will come down from their current levels, we do not think that the list you have seen is sustainable. But we think that they will not drop below the sort of levels we saw in January when they had fallen to very low levels across the board. Reema: Any numbers? What would be the average steel prices? How much would it come down by? Bloxham: I do not have any numbers in front of me right this second. Latha: What is your guess? Does USD 370, that is the current landed price in India become USD 330 or USD 300 per tonne? Jefferies: In India, what is interesting is, just in terms of steel production is about 83 million tonnes in the last financial year. It came off a little bit in the last quarter. It is expected to be fairly stable this year. We have got some public funding on the roads and highways in India and stable auto demand. So, generally, India is looking quite good at the moment. In terms of pricing, it is difficult to predict what is going to happen in the future in terms of the pricing. I know, when it comes to the Chinese market, if we go back to that, the March-May period is a good demand season. That is when construction takes place, so although I would agree that overall, there is bearish sentiment in all commodities and there is an oversupply globally, just in this short period of time between March and May is construction season in China. Latha: I just want you to give me some idea of how bad things can get. If this is a over-swing, then is USD 330 per tonne likely to hold? Is USD 350 likely to hold? Jefferies: It is very difficult to predict. You could argue that there was a correction on the prices previously. So, right now things are looking quite good at this moment in time, but going forward, it is quite difficult to say what the future holds. Reema: Are you getting early signs that supply perhaps, will get moderated and that could keep these prices supported? Jefferies: Certainly, in terms of exports out of China, supply has been moderated and that is because the demand has been good in China. So, definitely, there are less imports going into India, Korea, Vietnam, etc. and that is why we have seen a rise in prices recently. Latha: Will USD 300 per tonne hold? Bloxham: As the other commentator was suggesting, it is a hard thing to forecast exact estimates. But, we do think that the prices are not going to stay where they are. We think they have risen too much and we do think they will come down. We do think that the first quarter is mostly a seasonal story and the fundamentals do not support the current prices to continue at that level.