Stockpiles point to steel glut
Signs of a potential supply glut in the overinvested mainland steel market emerged in the first quarter of this year, as inventories of low-end construction-grade steel swelled and prices began to fall.
However, prices for higher quality flat steel remained buoyant.
According to the China Iron & Steel Association (CISA), inventories at 66 large and medium-sized steel enterprises came to 4.05 million tonnes at the end of last month, up 42.68 per cent from the start of the year.
The most heavily stocked products were reinforcement bars and wire rods used in construction.
'Since March, international construction steel prices have been on the rise, but those on the mainland have fallen,' Xinhua quoted Luo Bingsheng, a vice-chairman of the association, as saying. 'This phenomenon should raise some concern. If supply exceeds demand by a wide margin, a string of companies could be forced to cease operations.'
Concerns about overinvestment and future oversupply have caused share prices of H-share steel firms to plunge by more than 30 per cent over the past two weeks.
According to mainland steel traders, reinforcement bars and wire rods are fetching about 3,500 yuan a tonne, down 12.5 per cent from the peak of about 4,000 yuan in the first quarter.
Prices of hot and cold-rolled flat steel sheets used in the manufacture of ships, cargo containers and vehicles have yet to cool off.
Hot-rolled sheets are changing hands for about 4,500 yuan a tonne, on par with the first-quarter peak, while cold-rolled sheets have hit 5,500 yuan a tonne, up from 5,000 yuan.
Although the central government has ordered a ban on new low-technology, polluting small-scale steel projects, Mr Luo said factories that made higher-end products should still be supported.
According to CISA, 80 per cent of the 37.17 million tonnes of steel China imported last year were hot and cold-rolled sheets and their derivatives, such as galvanised and colour-coated sheets.
'We believe that the current cycle will peak during the next nine to 12 months,' Daiwa Securities analyst Geoffrey Cheng wrote in a research report.
'Overproduction, excessive inventory, and the inability of downstream steel users to absorb further cost [increases] will likely be the triggers for our predicted down-cycle.'