Courtesy of UBS comes an informative Q&A with a Chinese steel trader:
Q: What is the outlook for Chinese steel prices & production?
Restocking has more or less run its course. Everyone is very cautious at the moment; mills particularly. Traders are cautious, they have slowed down restocking.
The month of May will be a crucial period as supply of steel is lifting as existing mills have ramped up production, plus many mills that have shut down in the last 2 years are restarting.
Supply of steel is coming back quickly. April will be a record production month.
The key question will be whether or not demand lifts enough to absorb new production. And whether restocking will continue. Our contact is cautious.
Q: What is the evidence on underlying demand?
They talk to steel mills to try to understand end demand.
Property: In 1Q16, real demand into the property market accelerated; starting to improve in Jan & Feb. But much of this impulse has come from new credit growth so far this year.
Infrastructure: In 4Q15, China’s central government complained how local provincial governments had not started projects and were dragging feet on infrastructure construction.
In January, the rhetoric stepped up. The central government said that if provinces did not spend money the central government had given them, on projects that had been approved, then the central government would take the money back.
There was considerable pressure applied in Jan-16 to local govts to get on with it.
Q: What are we to make of apparently low steel inventories?
Does not think inventory number provided by Mysteel or CISA is a meaningful number to understand the market. It’s virtually impossible to collect all steel inventory data in China; there is no comprehensive system to measure inventories.
Right now, inventory has been accumulating based on what he’s seeing in his business; he does not believe that all the steel is being consumed; steel produced but not consumed is being stored right throughout the supply chain, at mills, in warehouses, at end user sites…inventory is nowhere near as low as it appears in the data.
Q: In summary, what does this all imply for the 3-6 month outlook?
In May and June, there will be a large lift in steel supply. But at same time, exports will drop.
At same time, domestic demand for steel will increase but likely not fast enough to absorb extra domestic supply.
The expectation on this basis is for steel supply growth to overwhelm domestic demand growth and, given likely lower exports, Chinese steel will move into oversupply.
Our contact expects this to pressure steel and iron ore prices lower from end May through June and into July.
Yep, looks like the juiciest iron ore short since early 2014 to me.
