Global long steel products market once again under pressure from Chinese supply

Conditions have deteriorated internationally in the global long steel products market during the past month mainly due to Chinese supply. Although it was expected, the global long steel products market is once again facing difficulties following a period of relief lasting two to three months.

Higher-priced market sparks surge in Chinese steel output

The initial price increases in the market were logical, as prices were below the cost of collecting scrap or of producing with scrap. But then prices rose too high, without support from demand or costs. After the Chinese stimulus package of April had pushed commodity prices higher, steel pricing soared. The Chinese decision made in early 2016 to reduce capacity was put off due to the higher-priced market. Chinese steelmaking output was quickly increased to take advantage of profitable sales levels, which is fine in the short term, but in the longer term it has again meant that there is now excess steel supply and as well as semi-finished steel that needs to be distributed in the international markets.

Destocking again observed, putting pressure on prices

As restocking has ended and as destocking is again observed in the global market, prices of scrap and semi-finished and finished products have all indicated corrections as anticipated. That said, in markets like the EU and the US, and for some certain products, availability is not great due to protective measures or reduced supply still prevailing.

Smaller price decreases in EU, European buyers look to domestic market

The price drop in the EU has not been so great as compared to other markets in the world mostly due to the unique situation according to which buyers failed to place their import orders before the price increases took place in the market. Then there was further hesitation in the market to place orders due to long lead times and a lack of trust in the sustainability of the high price levels. At present, most European buyers have to look to the EU domestic market for their material requirements.

Low-priced Chinese material again being offered throughout the market

The recent price movements were mostly driven by the actions of suppliers of Chinese origin material in the market. When prices were moving up fast there were a lot of cancellations in the international market which left buyers looking for alternative sources and in some cases left them desperate. Currently, we can again see Chinese origin material being offered all around the market and at lower prices everyday.

No significant change in global long steel demand

There has not been any significant change in demand in the global long steel products market. User consumption has not changed all year except for the usual seasonal ups and downs. Indeed demand exists but with the falling prices buyers are now very careful and most of them are postponing their orders. As there is now more supply in the market, those that need to buy are still in wait-and-see mode.

No change in China in terms of supply reductions

The supply and demand balance in the market is worse today since nothing has so far changed in China in terms of supply reductions, whereas output is significantly up in the rest of the world. This situation is causing a lot of problems and may cause further problems if it remains unchanged.

On the bright side levels of consumption are quite good

We all should be happy with the levels of consumption which are quite good. As mentioned above,  demand still exists, but is met by local mills instead of imports. After a month of low business volumes in international trade, it seems that market participants are again present in numbers at which business can restart. With the higher global prices came stronger supply which now needs to be absorbed. Although production was restarted in many sites on the back of higher prices, operations at a number of these production sites will remain halted in the future, helping to ensure an improved supply-demand balance.

Huge losses lately observed in steel futures market

Huge losses have been observed in the steel futures market lately. The futures market was supposed to reduce volatility but instead it caused the opposite during an 80-day spread, which is less than the typical buy/produce/ship cycle. Perhaps such losses may discourage similar speculation in future, which would otherwise contribute to further volatility in the market.

Finished steel product stocks appear to be at low levels in China

On a separate note, finished steel product stocks in China seem to be at low levels, which is expected to provide some relief in the international market, in addition to higher oil prices and the relatively weaker US dollar.

Some markets protected by trade measures, competition very strong in other markets

Some markets are protected by lots of antidumping duties and/or investigations, but competition in other markets is either very strong or getting stronger. The changes in input material costs are also adding fuel to the competition in the market. As the number of contracts concluded during the past five weeks were not many, competition is expected to be very strong in the coming weeks.

Trade coming to grips with the new price levels

On the other hand, the steel trade is coming to grips with the new pricing levels and once market participants are able to make it work we will see the trade routes return to normal.

China has to consume what it produces, rest of world has to stop excess Chinese supply

However, China in the first place has to continue with new investment plans to consume what they produce. That said, the end of May figures show that the supply surplus is still increasing. Accordingly, the rest of the world has to take necessary measures to stop excessive Chinese supply, otherwise it looks like the Chinese will not be able to reduce their supply voluntarily.

High volatility foreseen in semi-finished steel and scrap markets

The market will now again overshoot on the negative side and we will likely see continued high volatility in the semi-finished steel and scrap markets. Going forward, we will have to get used to a higher degree of volatility in the international markets amid fluctuations in Chinese steelmaking production.

Current major issue is deferral of purchases by consumers – market is unpredictable

Prices could rise again for no apparent reason. The major issue at present is that consumers worldwide are deferring their purchases. The market seems to be driven much more by speculation or sentiment than by facts or fundamentals. As a result, the market situation is quite unpredictable.

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