Weak Chinese steel output persists

To underline my point this morning that Chinese steel production remains weak and there’s little evidence of a rebound in demand despite stimulus-excited iron ore markets, here some more from Citi:

For the iron ore producers China’s steel production/demand is the all-consuming barometer of sector health given China imports ~70% of iron ore requirements and represents a similar amount of the seaborne market.

On this front there is no denying that 1Q14 has been a weak start to the year after the typical recovery post Chinese New Year failed to eventuate. In 1Q14 Chinese steel production was largely flat year on year steel, which when combined with an increase in both steel exports and inventories paints a particularly weak underlying demand picture for steel in China.

Although we expected a largely flat 1Q for Chinese steel production, our forecast for overall Chinese steel production growth in 2014 is up 4.7% to 843mt, after the 7.5% growth in 2013 to 805mt – official steel production reported was 779mt, up 7.5%, but this is widely recognized as being under reported and we try to account for this from tracking other sources and accounting for them in our estimates/forecasts.

Given a flat start to the year, production growth for the remainder of the year will need to be >6% to reach our forecast. Although this is achievable, any shortfall would increase the 67mt 2014 surplus that we forecast as seaborne supply growth continues to hit the market, especially from the Australian producers.

Achievable although it may be, the market is increasing speculating that there is the need for stimulus to accelerate growth in China and achieve the 7.5% GDP growth target.

I expect stimulus and steel output to disappoint and for the iron ore surplus to be higher.