Low Inventory Supports China Steel Margin
August 2018
AME expects average 2018 global steel prices to be higher than 2017 from sustained demand and improving utilisation rates. Demand growth in China is expected to continue, albeit at a slower pace of 0.9% due to a push for financial consolidation and tighter regulation in the real estate sector, however recent stimulus could provide an upside for the near term outlook.

The China rebar price averaged US$542/t for the month, down 2.8% from June. China HRC prices were down 4.6% month on month in July to US$544/t. Meanwhile, US HRC prices were up 0.6% month on month in July. China rebar prices edged higher than HRC prices in late July, as China’s manufacturing activities were impacted by trade disputes.

China’s apparent finished steel demand reached 74.3Mt in June, while crude steel production was up 5.8% year on year to 80.2Mt. Domestic steel rebar inventory declined further to 4.1Mt, while HRC inventory remained low at 2.1Mt in late July. This compares to a two-year peak of 9.8Mt and 3.1Mt respectively in mid-March. Despite high steel production, inventories of rebar and HRC products are at a low level. This reflects robust demand but the reality that the trade dispute may lead to an increase in HRC inventory. The low level of inventories should support steel margins in the September Quarter.

US HRC and China HRC prices continued to diverge, after the US launched its first round of tariffs on US$34bn of Chinese goods in early July. The July spread widened to 74%, up from 35% in January 2018. The spread highlights a slowdown in China’s manufacturing sector hit by the US tariffs, with China’s Manufacturing PMI falling for the second consecutive quarter. AME expects the spread to shrink in the short term as further US domestic supply enters the market from restarts and ramp ups. The US is now escalating the trade dispute with a plan to impose a 25% tariff on US$200bn of Chinese goods, up from an initial 10% considered in early July. Elsewhere, the US has reached a preliminary agreement with the European Union on easing trade tensions. The negotiations mark the first easing in trade tensions between US and one of its four biggest trading partners.