These are great times for China’s gargantuan steel industry as product prices soar to multi-year highs, mills’ profits swell and speculators stake out record positions in futures markets in the country that makes half of global supply. They could be over soon.
While demand in Asia’s top economy has remained strong, “as the property market cools and investment growth slows, steel prices will start to fall,” Xu Ke, an analyst at Huatai Futures, said by phone from Shanghai. “We’ve seen many times in the past that when prices fall, they can fall very quickly.”
Prices sagged on Friday. Reinforcement-bar futures retreated as much as 3.5 per cent to 3,528 yuan a metric ton on the Shanghai Futures Exchange. The drop takes the most-active contract down from the highest close since 2013 on Thursday, when open interest was at a record, and pares a fifth weekly advance that’s the best run this year.
China’s old-economy steel industry is booming even as the central government seeks to rein in its more unruly elements and combat overcapacity. State-ordered closures of induction-furnaces have spawned a shortage of reinforcement bar, a basic product used in construction. That’s hoisted prices and attracted speculative interest. Still, with slower growth seen this half, and other mills expected to boost output, the rally may be set to falter.
“There are fundamental factors underpinning the price surge,” said Xu, citing the tighter supply after the government efforts to cut steel capacity. He added: “I’m generally more bearish about the second half than most.”
For now, mills are showcasing impressive second-quarter figures after profitability surged. Angang Steel Co., the listed unit of China’s fourth-biggest steelmaker by output, said on Thursday it expects first-half net profit of 1.82 billion yuan compared with 300 million yuan a year ago. On Monday, Hesteel Co., the listed unit of China’s No. 2 producer, said first-half profit could triple.
In June, Fortescue Metals Group Ltd., the Australian iron miner, highlighted the shortage of rebar and higher prices. At the same time, Chief Executive Officer Nev Power forecast rebar makers’ margins aren’t long-term, “and as new production comes in, we’ll see those margins come back to normal.”
