Commodities | Feb 11 2009
By Chris Shaw
Having dealt with a stream of bad news in recent months, investors have picked up some signs of optimism emerging from the Chinese steel and raw material markets, but as Barclays Capital points out, investors would do well to not get too carried away given market conditions remain difficult at best.
Barclays notes Chinese steel production in December, while down a little more than 10% in year-on-year terms, was actually up 7% on a month-on-month basis, which has led some in the market to suggest a reversal to what has been a several month downtrend in output.
As well the group notes there are reports of a large order from the Chinese Ministry of Railways. This comes at the same time as a 170% increase in the Baltic Freight Index from its lows in early December suggesting a strengthening of Chinese iron ore demand. The final indicator getting the bulls excited is another increase in China’s Purchasing Manufacturers Index (PMI), which in January posted its second month of gains post its record low last November.
Taken together these indicators suggest improving conditions in the Chinese steel industry, but Barclays also sees a few reasons investors need to be cautious about the apparent improvement. Firstly, there is the fact last year saw significant de-stocking among steel producers, so some sort of re-stocking was inevitable. This doesn’t necessarily imply ongoing stronger demand.
The other issue in the group’s view is it would be easy for the re-stocking process to go too far as automobile production and construction spending in China are both still falling sharply, meaning the re-stocking could accentuate any overhang in inventory levels.
On balance the group suggests price risk remains to the downside rather than the upside, meaning recent gains on the back of the better numbers coming out of China may not prove sustainable. Steel industry consultant MEPS takes a similar view, suggesting steel consumption, not only in China but through Asia, is likely to remain subdued in coming months.
As well, MEPS expects raw material prices at upcoming contract negotiations to fall, an outcome it sees as limiting the potential for any significant upward movement in steel prices. Add in the fact there is new capacity set to come on stream in China in coming months and the expectation Japanese consumption will fall over the course of the year and MEPS sees steel prices as likely to fall in the second half of 2009.