Despite the current weakness in Chinese finished steel prices, MEPS is forecasting a strong recovery in selling values later in the year. Reduced steel output during the summer is expected to help the market digest currently high mill inventories. This should enable an autumn recovery in steel consumption to translate directly into a sharp upturn in steel prices.
The rising figures should be sustained going into 2013, as both increased building of affordable homes and more government support for infrastructure projects results in greater demand for construction steel. However, selling values are unlikely to recover to 2011 levels. Iron ore costs in 2012/13 are expected to be lower than during that year due to reduced steel output in other countries and increased supply of the material. A sharp deterioration in the global economy, could, delay new mining projects. In these circumstances, cost support could push Chinese steel prices higher than MEPS forecasts.
Although domestic steel prices have somewhat stabilised in recent weeks, we expect the market to remain weak during the summer. Shanghai spot prices for hot rolled coil ended week commencing June 22 at RMB 4280 per tonne with rebar at RMB 3910 per tonne.
Iron ore prices have risen recently but MEPS believes that this will not lead to significant upward pressure on steel selling figures in the short term. Firstly, purchases of iron ore appear to be mainly driven by restocking activity. Inventories at both port and mills are low, with Chinese mills taking advantage of previously cheap material to replenish stocks.
MEPS predicts near term weakness in steel production and questions the sustainability of current iron ore purchasing activity. Moreover, the company states that the temporary boost to cost support from rising iron ore prices has been more than offset by a sharp fall in the price of domestic coking coal. Consequently, key raw material costs have fallen to their lowest point this year. With demand growth softening going into the summer and sustainable cost support lacking, steel prices are, therefore, likely to record further falls in the short term.
Source - MEPS