Liquidity Easing Favorable for Steel Market Recovery

SHANGHAI, Mar. 23 (SMM) -- According to latest data from the People's Bank of China (PBOC), China’s yuan-denominated foreign exchange reserves added RMB 25.12 billion in February. China's foreign exchange reserves increased significantly in January 2012 after falling for three consecutive months in 4Q 2011. Data shows that the growth of foreign exchange reserves slowed noticeably in February.

According to the China Monetary Policy Report (4Q, 2011) released by the PBOC, the broad money supply (M2) is initially expected to increase by 14% in 2012. If China's foreign exchange reserves remain low or continue to flow out, the PBOC must increase total new yuan loans, which will also improve expectations that the PBOC may cut the banks’ reserve requirement ratio (RRR) again. 

Liquidity easing is favorable for the recovery in steel markets. Steel markets stabilized in March. Imported ore prices were stable. Total imports of iron ore grew noticeably in February, and iron ore inventories at ports continued to decrease slightly. Domestic ore prices were stable. According to the China Iron & Steel Association, average daily output of crude steel was growing, but finished steel inventories fell further due to improving demand. The construction on affordable housing starts as the weather turns warmer. Meanwhile, a number of key national projects and a number of "12th Five-Year" plans will be introduced in 1H 2012, and positive policies are expected in 2Q as the 1Q is nearing the end. Cash liquidity will gradually decrease following the start of construction on large projects. In this context, there is high possibility that the PBOC will lower the RRR in 2Q given further falling foreign exchange reserves. Steelease believes the impact from previous RRR cut on steel markets is minimal, but the possible RRR cut in 2Q will give a boost to steel markets since steel markets are recovering now and downstream demand is improving continuously as well.