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Chinese steel sectors may be passing the peak

Mr Clyde Russell wrote for Reuters that it’s been a long time coming but Chinese steel prices are finally showing signs of running out of steam, with futures having dropped for six straight sessions. The Shanghai Futures Exchange benchmark rebar contract closed at CNY 4,160 a tonne on August 29th having retreated from the seven-year high of CNY 4,418 a tonne, reached on August 22. The recent declines point to an increasing tug-of-war between still robust margins for steel makers and the likelihood of slowing demand growth in China, which produces about half of the world’s steel.

Output curbs related to efforts to control pollution and the cutting of older, less efficient capacity, has boosted the industry’s fortunes. Improving profits have allowed steel mills to boost production by employing higher grade iron ore as a feedstock, which has the added benefit of requiring less coking coal per unit of steel produced. The result has been record output, with China producing a fourth straight monthly high in July of 81.24 million tonnes. Year to date output to end-July grew 6.3 percent compared with the previous year to 532.85 million tonnes, as profit margins reached around CNY 1,100 a tonne, according to analysts from Huatai Futures.

While it’s logical to expect steel mills to maximise production when profit margins are elevated, there is some concern as to where all the steel is going. The key construction sectors appear to still be enjoying strong activity, but perhaps not enough to justify a 6.3 percent increase in output.
Source : REUTERS
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