Chinese Steel Production To Likely To Find Support And Exceed Expectations
11 July 2016
China’s economy has experienced a significant turn since the first two months of the year and could far exceed second half of the year expectations. There also is a real chance that steel production will find strong support later this year. Overall, China has come a long way from earlier in the year when many were predicting a hard landing would occur — which was a view that had real merit considering the equity market turmoil that stretched on from the second half of 2015 into this year. The first two months of this year saw the Shanghai Composite Index fall by another 24% — but since the start of March, the Shanghai Composite Index has stabilized and has rebounded by 11%.
The government has had much to do with the equity market recovery, but the fact remains that China has been able to move past its equity market turmoil just as it moved past 2013’s liquidity crisis and 2014’s trust and corporate default issues. It is not only the equity market where change has occurred. Industrial production growth, steel production, and cement production have all seen positive changes as well. During January and February, China’s industrial production grew by only 5.4% and marked the lowest level seen since November 2008. Since that time, however, industrial production growth has increased (most recently showing 6% growth) and late Q1/Q2 also saw a dramatic rise in steel production. The first two months of this year saw China’s crude steel production fall year-on-year by 7%, but March through May saw year-on-year growth of 1%. Chinese cement production also saw year-on-year growth return beginning in March. The first two months of the year saw Chinese cement production fall year-on-year by 9%, but March through May saw cement production rise year-on-year by 9%.
Overall, a significant change has been seen in China since March. Also remaining very positive is that the government has continued to work to stimulate the economy, and prior efforts to reign in overall growth remain a thing of the past. While calls for steel production capacity reductions also continue to dominate the headlines, steel capacity is different than steel production (China’s annual steel production capacity currently stands at roughly 1.13 billion tons, while annual steel production has been recently coming in at around 800 million tons). Going forward, Chinese steel production could easily achieve strong support during both the near term and long term, as long as steel mills are able to continue to profit. Large steel firms in China achieved a profit of approximately $1.3 billion during January through May, which marked a 700% year-on-year increase and remains encouraging.
The expectation in various markets has been that Chinese steel production is poised to fall by a large amount, but this is not at all guaranteed to occur any time soon. Commodore’s main concern recently has been global iron ore prices faring better than Chinese steel prices (as was seen during much of June and in early July), but steel prices did revert back to finding relative strength over iron ore prices last week. This is a positive development for China’s steel mills, and is also what was seen during the vast majority of March through May which allowed Chinese steel production to surge during those months). Commodore believes Chinese steel production has the potential to exceed the many bearish expectations that remain for the second half of this year. Chinese steel stockpiles are currently at historically low levels, and we expect Chinese steel production will show year-on-year growth during the second half of this year.
China’s day-to-day economy has recovered since March (even while under the surface very real problems continue to fester in China’s financial system). In some ways, China also has even flourished recently — especially in comparison to other many other economies’ large trade deficits, contractions in industrial production, and interest rates remaining close to zero (and in some countries below zero). We believe that the positives in China are not being fully acknowledged in various markets. Yes, analysts are no longer insisting that China’s foreign currency reserves will soon lead to calamity in China, and the great concern over the recent devaluation of the yuan has largely subsided as well. However, what is not finding its way into the global narrative is that China’s overall industrial production growth could very well rise further this year, and that steel production could find strong support during the second half of this year.
Source : hellenicshippingnews.com