No recovery of steel prices in sight

by David Fleschen

October's PMI in China has been weaker than expected. The problem is that the economic downturn now seems to have hit the services sector as well, with PMI falling to 52.8, the lowest level since the 2008 economic crisis. Although our China analysts warn against over-interpretation of Chinese PMIs as reliable leading indicators, these are by trend important. Still, they indicate no bottoming or even recovery. The PMI for the steel sector in October fell to 41.3, its lowest level since 2015. Although iron ore prices have fallen sharply in recent months, the profitability of steel smelting in China has (obviously) not improved. In the first half of the year, the massive production restrictions following a dam failure in Brazil in particular pushed up the price of iron ore to more than 120 USD per ton (futures in Singapore). The December Future is now trading below $ 80 and the December 2020 Future below $ 70 per ton. According to estimates by the local steel association, China should produce around 1 billion tons of steel this year, or 7% more than in the previous year. The World Steel Federation (WSA), which includes most of the world's leading steel producers, has recently announced that production in its member countries was 1.4 billion tonnes in the first nine months of the year, up 3.9% year-on-year. In September, however, China's production and thus the global fell behind the previous year. We expect that the improved availability of iron ore, whose stockpiles in Chinese ports have risen sharply since July, and its continued decline in prices, should boost steel production in the coming months. Given the weak economic outlook, the price decline for structural steel on the SHFE should therefore continue after a brief interim recovery. As China remains the leading steel exporter despite trade restrictions, this should also put pressure on steel prices in Europe.

Source: Commerzbank Research, Photo: Fotolia

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