Chinese steel prices should hold to four-year highs even as levels look stretched, given state efforts to maintain stability before a ruling party meeting in the autumn and longer-term plans to cut output.

“We see this as a bubble,” said Kirill Chuyko, a strategist at BCS Global Markets in Moscow. “But it is likely to remain for another couple of months as the Chinese stimulus should remain fully on until the China National Congress in the beginning of the fourth quarter.”

The Communist Party congress, held every five years, will be led by Chinese President Xi Jinping as the country tries to sustain economic expansion, at the same time as reining in stimulus that’s left it overly reliant on manufacturing for growth.

The spur to demand from booming local factories and construction has pushed up Chinese steel prices and led to a sharp drop in exports. Overseas sales sank 32 per cent in July from a year earlier, the lowest level for the month since 2013, according to customs data released on Tuesday. In the first seven months, shipments fell 29 per cent.

The decline in Chinese exports is benefiting international producers. ArcelorMittal, the biggest steel maker, reported its best six months’ profit in half a decade last month. At the same time, Chinese producers are gaining from surging margins between steel prices and costs such as iron ore and coking coal.

The shift, along with plans by China to shutter excess capacity, has blunted accusations by US politicians including President Donald Trump that a flood of cheap Chinese steel is destroying jobs for steelworkers abroad. China plans to close 50 million metric tons of steel capacity this year and as much as 150 million tonnes in the five years ending 2020 as it seeks to make the industry less dependent on the state.

“While Chinese steel margins appear unsustainably high, mounting supply restrictions may prolong the current upcycle to the benefit of global steelmakers,” said Seth Rosenfeld, an analyst at Jefferies International. “Chinese supply side reform, leading to lower exports at higher prices, has done far more to buoy global steel markets than Trump or any other Western politician could achieve.”

Aditya Mittal, chief financial officer of ArcelorMittal, said last month that steel margins have exceeded normal ranges and may fall back. “The number we’re seeing today has some risks,” he said. “What if the demand growth does continue as strongly in 2018 and 2019? That is the most significant risk that exists.”

Chinese steel futures rose to a fresh 4-1/2-year high on Thursday as investors remained bullish ahead of production cuts in the world’s top steel producer.

Demand remained strong, encouraging steel mills to keep offer prices high. Iron ore futures also climbed.

The most-active rebar on the Shanghai Futures Exchange closed up 0.9 per cent at 3964 yuan ($US595) a tonne. The construction steel product hit a session high of 4016 yuan, its strongest level since March 2013.

“The order books are full at many mills through August so they are very aggressive in asking for high prices from customers,” said Richard Lu, analyst at CRU consultancy in Beijing.

Even if steel prices do retreat later this month or in September after recent rapid gains, Lu said he doesn’t “expect prices to collapse quickly”.

The most-traded iron ore on the Dalian Commodity Exchange gained 0.9 per cent to end at 563.50 yuan per tonne.

While overall iron ore supply in China is high, particularly at its ports, traders said availability of high-grade raw material is limited. Steel producers are increasingly opting for higher grade iron ore to boost efficiency.

“There isn’t a lot of high-grade around and Chinese mills are preferring high-grade because they want to produce more with steel prices rising,” said a trader in Jinan in China’s eastern Shandong province.

Stockpiles of imported iron ore at China’s ports stood at 139.15 million tonnes on Friday, according to data tracked by SteelHome.

by Thomas Biesheuvel
Financial Review | With Reuters

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