SHANGHAI, Jul 23 (SMM) — This week is the second week of a comprehensive inventory reduction driven by a decline in supply-side output. Inventories of rebar across Chinese steelmakers and social warehouses stood at 11.37 million mt as of July 22, down 0.7% from a week ago. Stocks are up 3.8% from a year earlier.
The scope of production cut continues to expand this week. All steel mills in Fujian Province received a notice last weekend that the annual output couldn’t exceed last year. The Shanxi Ecological Environmental Protection Inspection Team carried out the second round of ecological environment inspections in Shanxi Province on Tuesday, and found that the steel mill industry exists fraudulent conditions and some steel mills have inspection expectations. Jiangsu Province is rumored to be formulating a production limit plan from August to December, and long steel output is expected to be reduced by 4 million mt. In addition, Shandong, Sichuan and other places are also expected to suppress production. The momentum of continued production growth has been curbed, and production fell 5.5% month on month this week. Inventories at Chinese steelmakers fell 64,500 mt on the week and stood at 3.24 million mt. Stocks are down 2% from a week ago and up 3.2% from a year earlier.
There were more high temperature and heavy rains across the country this week. Some areas such as Henan suffered flooding and natural disasters, and market sales were basically suspended. Steel prices traded strongly this week, but traders were still not actively building positions. Some contracts, spots and speculative demand entered the market inapparently. The market transactions were not as good as last week. However, due to the strong driving force of upstream decreasing stocks, social inventories ushered in a downward turning point this week. The downturn of social stocks in previous years was also driven by the recovery of demand. The situation is slightly different this year, and the time node for the decrease of stocks comes earlier.
Inventories at social warehouses fell 20,400 mt on the week and stood at 8.13 million mt, down 0.2% from a week ago and 7% higher from a year ago.
At present, production and inventory have entered a stage of overall decline, and the expected production restriction has been initially implemented, which has a strong boost to the confidence of the steel market. Steel prices will become firmer and more resistant to falling. Traders will also choose opportunities to build positions based on the expected shrinkage of production. However, the benefits of limited production have been digested in advance and even overdrawn in the early stage. The upward space and motivation of the market outlook will be slightly insufficient, and the speculation of funds needs new stimulus points.
The current market already has expectations of demand management. Due to the poor performance of various economic data in June, it indicates that China's economy may enter a recession in the second half of the year. Real estate and consumption are the main drags, and the rumors about steel export tariffs on the export side have intensified, which is negative news for the steel market. At present, it seems that the expectation of steel demand in the second half of the year lies in infrastructure. From the issuance of special bonds, it is more likely to accumulate quotas for large projects in the second half of the year, and it is likely to form a hedge against the economic slump.
In addition, the current policy focus is still in the process of insuring prices and stabilising supply, and it has risen to the level of people's livelihood. The current steel prices are relatively close to the policy warning line, and the Ministry of Industry and Information Technology Development and Reform Commission has successively voiced that the macro-control is gradually escalating, and the upward space of steel prices is narrowing.
The decline of both output and inventory indicates that the fundamentals of supply and demand have begun to turn from weak to strong driven by supply-side contraction. Steel prices will fluctuate strongly amid the expansion and implementation of the scope of suppressing production and escalating macro-control.
