Indian iron ore exporters report no deals this week China steel prices lower on sharp correction

Print this page Posted on : 08-22-2009 by recycleinme.com

The price of benchmark hot-rolled coil in China plunged 7.6% to around 3,987.5 yuan a tonne this week.

Reuters

Seoul, Aug. 21

As debate grows over the possible deflation, or not, of a China asset price bubble, the commodity right at the core of the world's third-largest economy has this week succumbed to its sharpest correction this year - steel.

Hits iron ore

After a months-long rally to a 10-month high last week, the price of benchmark hot-rolled coil in China plunged 7.6 per cent to around 3,987.5 yuan a tonne this week, data from Metal Bulletin showed.

That in turn has dragged iron ore prices off their peaks as well, with Indian spot market exporters reporting virtually no deals this week, adding further complexity to price negotiations.

Change in outlook?

The question, of course, is why: Has the outlook for Chinese demand changed that dramatically? Has the risk of tighter policy from Beijing spooked speculators? Or was this simply a long overdue correction after a nearly 30 per cent rally since late April that most analysts had said ran far ahead of fundamentals?

The answer may be a bit of everything.

Fundamentals, to be sure, are tenuous: amid the promise of a steadily improving demand outlook driven by China's nearly $600-billion infrastructure-focused stimulus plan, China's steel mills pushed production to record 50.68 million tonnes (mt) in July.

OUT OF STEP

At 600 mt on an annualised basis - a 20 per cent surge from last year's 500 mt - output appeared out of step with end-user demand which lagged far behind.

That heavy production had also pumped up demand for iron ore, the main ingredient, but that too now appears to have evaporated.

"The market is not good. Liquidity in China is bad. I have heard of iron ore deals being done at $105 a tonne versus $110-$112 last week," said an iron ore trader in New Delhi.

FINANCIAL PLAY

But steel, like other industrial metals, has over the past month become an increasingly popular speculative play, with China's easy credit policy driving funds toward any liquid markets with a bright outlook.

Shanghai rebar futures - languished with minimal trade after its March debut, but broke onto the main stage this month, with trading volume surging seven-fold from end-July and open interest nearly doubling in just over two weeks. Meanwhile, prices have collapsed 14 per cent from their record high on August 4.

The liquidity-driven futures market is increasingly dragging the more fundamental physical market with it - as Shanghai surged, mills rushed to raise prices even during the dull summer season.

The sell-off has coincided with China's stock market's collapse of 20 per cent in just two weeks, sparking worries that it may signal underlying economic weakness in China, and evidence of sharply reduced new bank lending in China could extend it.

The threat of destocking by speculative investors or traders, uncertainty over end-user demand and continued full-steam production by mills all loom large over the market.

Even positive macro data - such as the annual 11.6 per cent rise in housing investment in the first seven months - failed to counter widespread expectations of a pull-back that has just begun.

''Traders, who have restocked, feel that they do not need to make fresh purchases at current levels, especially as they expect prices to fall. This could lead to a further price correction,'' said Goldman Sachs analyst Mr Rajeev Das

Source : Business Line