3 Times Boost in Infrastructure Development Reform in China Increases the Cost of Steel

Stocks of reinforcing steel bars, used in construction, fell for the sixth week, contracting 6.8 percent in the period to April 15, its biggest drop since October 2014, according to Shanghai SteelHome Information Technology Co. Steel reinforcement futures in Shanghai rose to the highest level in a year on Tuesday, and have increased by 39 percent so far in 2016. Spot prices have risen 46 percent.

The 2016 rebound comes after five consecutive years of casualties and has been a welcome respite from the world’s largest steel industry, which has been struggling with excess capacity, losses and forecasts of low long-term demand. In March, Chinese production plants produced more metal than in any other month when the economy stabilized, credit increased and there was a rebound in the property sector. The surprising recovery of the largest steel producer has also helped to raise world prices for iron ore.

” The steel mills now have their complete order books until July and onwards,” said Li Qibao, an analyst at Changjiang Futures Co. in Wuhan, who predicts prices will continue to rise. There are “unmistakable signs of demand recovery, with the help of a construction boom, which is back in full swing”.

Never before

Never before has steel inventories been so low at this time of year, said Gao Huaming, director of Stocks of reinforcements controlled by Shanghai SteelHome stood at 4.675 million tons on April 15. What compares with 6.84 million tons the previous year and 8.04 million tons the same week of 2014.

Producers and traders, anticipating more losses this year, did not carry out their usual seasonal winter storage, making the level “terribly low” this spring, according to Li Wenjie, general manager of the Shougang Alliance of Xingang Science & Trade. Co. in Beijing.

The increase in steel prices has been of great help for the actions of the production plants. Wuhan Iron & Steel Co. has had a 33 percent spike since it closed at a low in early February. Angang Steel Co. has recovered by 17 percent, even after warning this month that it is still facing a loss in the first quarter.

The sector’s efforts to take advantage of the recovery are hampered by the government’s campaign to reduce excess capacity and emissions, within what is still considered the worst deceleration in a quarter of a century, according to Su Feng, director General Sales at Anyang Iron & Steel Co.

In addition, the pressure to increase supply and take advantage of the jump in prices can lead to a new crisis when production once again exceeds demand. The rebound in steel prices is likely to fade when producers who were caught off guard by rising prices re-start their plants, Macquarie Group Ltd. predicted last month.

“Over time, production will rise to a level that will once again take the market to an oversupply,” said Xu Xiangchun, chief analyst at Mysteel Research. “The Chinese steel industry continues to have a serious excess capacity, which is why the oversupply will return.”

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David Evans

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