Steel prices remain volatile amidst uncertainty

Thu, Nov 5 01:50 AM

Contrary to what most of us believed, steel prices have recovered marginally in China. It is more for HR coils. Elsewhere in the world, the downtrend continues, although in most places, the prices of HR coils are still higher than the domestic prices in China or those exported from that country. Where did we go wrong?

In fact, what looks to be the case at this stage is that the speculative forces are very strong in the country. The Chinese traders too, who booked large quantities at higher prices, will not easily give up losing money in panic. If necessary, they will hold stock. This does not cost them as much as the price they will have to pay for getting driven to panic. It is easily understood, there are limits to how long they can hold stock. Also, the HR coils prices in China's future market are also high. Many are totally engrossed in that. Fall in prices will not help them.

It is also possible that the mills and the traders have decided not to be aggressive excessively to enlarge their market share in the world market by selling more at lower prices to pre-empt in some way any kind of global attention bringing them to face cumbersome trade cases and in the process lose vital markets altogether. Also, following the global price level, set by forces elsewhere, makes more sense. One needs to keep the prices a little lower and gradually bring them down instead of going all out to grab the market. Therefore, what could have happened logically, a fall in the prices of HR coils to a level below $400 per tonne, has been averted and small adjustments are being made to gradually to move to the $500-520 level to be in line with the global trend.

The fundamentals in the market in China, demand and supply, are still not supportive of the prices at current levels. The actual consumption of steel in China is coming down and there are reports of significant inventory build up across the nation at various levels of the supply chain. The onset of the winter will reduce steel consumption in the country, as also in various places in the northern hemisphere. While the declining trend in the western world expresses the typical seasonal decline, the Chinese market is defying most part of the common logic.

But, how long will the Chinese players in the market hold out against such pressures from the fundamentals of the market? It is true that the Chinese realtors are maintaining a massive project construction rate and are keeping the confidence of the investors high despite tight credit supply conditions. There is still a lot of money in the system and the Chinese individuals are speculating heavily in real estate and are investing on it. The housing stock in the country is rising rapidly everywhere. So long the speculative boom is here, there are no worries. But, can this be sustained by the banks loaning out to both the realtors and the individual home buyers? If one believes that the countries appetite for housing and infrastructure is insatiable, then we will have to read the story differently. In that, we will see China taking much bigger leaps and steel demand and production there will grow at huge pace in the years to come. But, such a growth story has not been very convincing at this stage and most will find it hard to accept as neither the known state of the Chinese economy and the experiences globally so far have been a hard ground to expect the Chinese steel industry or the economy for that matter remain strong forever.

Also, immediately, the Chinese mills are holding stock of iron ore bought at prices ranging from $85-95 with them. Their spot purchases of coking coal were also at higher than the annual contract prices. Therefore, they may not be interested in selling steel at prices below $400 a tonne.

Chinese steel makers will slowly adjust to the global conditions of the market. They will follow the CIS offers closely. There is no need to dismiss a panic driven pessimistic scenario in a hurry. Let's wait and see.

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