China’s steel demand may not see sustainable growth

To some extent, the recovery of China’s industry explains the trend of rising iron ore and steel prices this year. However, the country’s latest trade data remind investors that this reason is very fragile.

China’s net steel exports in April increased by 8.8% year-on-year, and net exports from January to April increased by 9.4% year-on-year. The question is: during the period from January to April, the price of rebar futures for delivery in recent months on the Shanghai Stock Exchange soared by 48%, suggesting a potential increase in demand. Why would steel mills export more steel during this period? Shouldn’t it be sold more domestically? At the same time, steel production remains weak, and it is unlikely that steel mills will increase production for export.

The answer may be that China’s steel demand has not seen sustainable growth. The use of steel has picked up around March, which is a seasonal phenomenon, but even so the increase is not so significant. The job of steel traders is to forecast demand in industries such as real estate. At the beginning of this year’s construction season, their steel inventories were lower than the same period last year, indicating that the potential actual demand in the industry is limited.

Tracy Liao of Citigroup Inc. estimates that based on changes in exports and inventories, China’s actual steel demand fell by at least 7% year-on-year in April. The actual demand from January to April fell by at least 5% year-on-year.

The above data has aggravated investors’ concerns that speculative behavior spawned by the loose credit environment is the main driving force for pushing up steel and iron ore prices. Steel and iron ore futures prices fell sharply again on Monday. Taking into account the lack of potential demand, it should not be surprising that the prices of the above-mentioned commodities have fallen further.

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