China RRR Cut to Have Little Impact on Steel Prices

SHANGHAI, Feb. 20 (SMM) -- The People's Bank of China (PBOC) announced on February 18 that it will lower banks' reserve requirement ratio (RRR) by 50 basis points starting from February 24. The cut will drop the RRR to 20.5% for large commercial banks and will release an estimated RMB 400 billion in capital into the market.

Steelease believes China’s RRR cut is aimed at easing cash liquidity and offsetting continuous declines in China's funds outstanding for foreign exchange. Meanwhile, although the CPI growth was as high as 4.5% in January, China’s inflation rate is still on a downward track.

Steelease believes any effect on steel markets from China’s RRR cut should be limited.

First, time is needed for any changes in RRR to be felt by steel prices, and the effect of China’s tightening monetary policies in 1H 2011 did not materialize in steel markets until September.

Second, some banks in Shanghai and Jiangsu tighten loans to steel traders, and future approval for loans will be more stringent, which will unlikely enable liquidity released by RRR cut to flow into steel markets and the steel industrial chain.

Third, traders and downstream consumers in steel markets showed neutral response to the RRR cut, and they remain cautious or pessimistic toward steel price trends.

As downstream demand for steel products has not improved, and steel inventories remain high, and iron ore prices also fall slightly, Steelease believes steel prices will face strong pressures from rising in the short term, with prices expected to slip slightly over the next 1-2 weeks.