China's steel market seemed to be cruising along merrily in 2018 but then hit the skids in September and has yet to recover. Is the market witnessing a price correction, or is it something more serious? S&P Global Platts Senior Managing Editor Paul Bartholomew shares his insights as the specter of China's overcapacity hangs over global steel markets.
Welcome to The Snapshot, a series examining the forces shaping and driving global commodities markets today.
Global steel markets, led by China, started emerging from several bleak years at the start of 2016. Last year and much of 2018 have been particularly strong, despite the steel import tariffs introduced by the US in March. But since September steel prices have been on the slide. The price of Chinese hot rolled coil sold domestically has fallen by 15% since late August.
Rebar prices were more resistant but they too have plummeted by more than 20% since the start of November.
It begs the question: is the market witnessing a temporary price correction – or is it something more profound? In the case of China, the answer is probably both.
Domestic steel prices ran up on expectations of supply shortages caused by China's impending winter steel production cuts to improve the environment. When it became clear that the output cuts may not be so pronounced, sentiment faltered and prices came back down again.
But it's the demand side of the equation that is more concerning. Improved market sentiment after the tariff cease fire between China and the US at the G20 meeting buoyed steel prices temporarily - but fundamentals quickly prevailed.
China's car sales will record negative growth this year for the first time since the early 1990s. Manufacturing is barely growing.
Property construction is still robust and housing starts increased by 16.3% over January-September. There is plenty of rebar sticking out of concrete still.
But a recent report by S&P Global Ratings noted that China's property market has peaked and prices of apartments and houses may fall by 5% next year, as the overall sector contracts.
Beijing has spent much of this year deleveraging, trying to address debt and shadow banking. But the economy slowed more than expected and now the government is working its way up through the investment gears again. It is investing again in infrastructure to get the economy cranking.
But there will be a lag before the sector starts having any notable effect on steel demand.
Many of the demand dynamics seen in the final quarter of this year will still be there in Q1 next year and beyond.
Therefore, the downwards pressure on prices will continue – particularly if steel production continues at record levels.
S&P Global Platts' China Steel Sentiment Index for December recorded a headline reading of 30.66 out of a possible 100 points. December's index marked a slight recovery after a very weak result in November. But what was noticeable was that expectations for new export orders reached a 38-month high.
China's international competitors will not want to see strong steel production allied with tepid domestic demand result in surging levels of exports.
Until next time on Snapshot, we'll be keeping an eye on the markets.