Steel is the world’s second most used material after cement, and China is the leading producer and consumer of steel and demand and supply from the country largely influence the global prices.
Oversupply in the market hit the prices of ferrous metals, with the most active construction steel rebar futures in benchmark Shanghai Futures Exchange plunging to a seven-and-a-half month low this week.
Similar moves were seen in the domestic steel prices as well.
Steel is the world’s second most used material after cement. China is the leading producer and consumer of steel, and demand and supply from the country largely influence the global prices.
Steel prices remained firm during the second and the third quarters of 2018 due to worries over supply squeeze in China amid their plan of cutting down the excess capacity of heavy industries.
As per the program, the country had closed down more than 200 million tonnes of steel capacity in just two years that raised concerns of supply shortage. Steel and aluminum plants in the country were operating with a spare capacity which impacted industrial profitability.
Expectations of a periodic output cut during winter on the remaining capacity kept prices firm, pushing up futures prices to a seven-year high during August 2018.
As per the Chinese government's mandate, heavy industries should reduce production during winter owing to environmental issues. However, prices lost more than 25 percent since then due to various fundamental reasons.
Healthy supply and worries on manufacturing growth in China are weighing down the sentiments. Demand for long steel products like rebar is high in construction areas, while flat products like hot-rolled coil especially from auto manufacturers are reportedly down.
The trade dispute with the US is putting pressure on the Chinese manufacturing sector and demand for metals. As per the Chinese Iron and Steel Association (CISA), the average daily crude steel production and inventories at Chinese mills have increased in the last month.
As supplies are on the higher side, traders are staying away from adding inventories, which is undermining the market sentiment.
In the meantime, the recent US and Chinese ceasefire deal for ninety days fueled gains in global stocks and metal prices. The possible demand for steel from automakers is likely to strengthen the market.
During the G20 meeting, the US President said that China has agreed to reduce and remove tariffs on cars imported by China from the US. This could perhaps boost demand for steel from western automakers.
China, the world’s largest car maker, had imposed 40 percent tariff on auto imports from the US since July, forcing US carmakers to raise prices, which hit the US auto sector.
At the same time, concerns over Chinese economic growth is weighing on the sentiments. Chinese economic growth has softened to 6.5 percent year-on-year in the third quarter of 2018, its weakest pace since early 2009, due to trade conflict with the US.
Latest official data also showed that manufacturing growth is at its weakest level in more than two years.
Export orders from the country too declined for the fifth straight month in August 2018, suggesting the intensifying trade spat with the US beginning to put a strain on businesses.
Looking ahead, even as the US and China agreed to suspend imposition of fresh trade tariffs, the temporary gains in prices are unlikely to continue amid weak market fundamentals.
Slowing manufacturing growth, high steel output, and the seasonal decline in demand could weigh on prices.
Though India is the second top producer of steel, it still largely depends on imports for special steel products like electrical and auto-grade steel. Hence, price movements in the overseas market is likely to drive the sentiments in the local market.Disclaimer: The author is Head of Commodity Research at Geojit Financial Services. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.