Chinese steel futures dip as traders brace for summer drop in demand

23 June 2015

Steel futures in China slipped 0.9 percent on Tuesday, their first day back after a long holiday weekend, with traders bracing for a seasonal decline in steel demand that is also set to undermine iron ore prices.

The most traded rebar contract for September delivery on the Shanghai Futures Exchange SRBcv1 dropped to 2,231 yuan ($359.35) per tonne, inching closer to a record low of 2,218 yuan set last week.

Major steel producers have started to cut their prices in anticipation of slowing summer demand. China's top private producer, Jiangsu Shagang, announced on Tuesday that rebar prices for late June would be slashed by 70 yuan per tonne.

Baosteel, China's second-biggest steel producer, announced cuts of 80 yuan per tonne earlier this month.

Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI slipped 0.2 percent tp $60.60 a tonne on Friday, before the holiday, according to the Steel Index. It fell 6.8 percent over the course of last week, the biggest weekly drop since early April, with oversupply still the prevailing concern.

"There are signs that some domestic iron ore miners have started to resume production as a result of the recent rally, but many steel mills have suffered losses of up to 200 yuan a tonne, which will deepen in the summer months," said Xia Junyan, an analyst with Everbright Futures in Shanghai.

Iron ore production in China reached 116.66 million tonnes in May, down 9.9 percent compared to the same month in 2014 but up 13 percent from April, with producers reacting quickly to the price recovery. But rising supply and weakening demand meant that another slump was very likely in the coming months.

"We can also tell from the swaps for future months, highlighting the market expectation that iron ore prices will enter the downward trend again," Xia said.

Chinese steel demand normally drops over the summer months as construction activities slow, but the latest data from the China Iron and Steel Association showed that production from major steel mills in the first 10 days of June rose 2.1 percent, with inventories also rising 3 percent compared to the May 21-31 period.

Analysts suggest the rise might be short-lived.

"In the absence of any pick-up in construction activity, negative margins are likely to constrain any growth in steel production that may emerge from the government stimulus measures enacted recently," said ANZ Bank in a note on Tuesday.