China Steel Sector - Destocking on track, expect firm pricing in long product, and mild downcycle in the near term

Steel prices in China have started seeing correction this week, with HRC price in eastern China declining by 2% week-on-week to US$517/t, the first week-on-week fall since end of 2008. Rebar price, on the other hand, improved by 3% over the period.

Steel price hikes have been driven by deep production cuts, continued inventory correction of downstream finished goods, moderate restocking in downstream sectors, and mild restocking by traders. With steel utilisation likely up by 8% from the trough, in the context of mostly unchanged real demand, we see short-term corrections in steel prices especially for flat products in the coming weeks. Nevertheless, long product prices should remain firm, outperforming flat products on seasonal basis.

We see the destocking cycle on track based on recent data points, and our positive view on Chinese steel stocks for six-nine months, as the best destocking cycle play, remains intact. In the short term, softening of HRC prices is likely to put pressure on Angang (0.9x P/B), but Maanshan (0.7x P/B) would be more preferred given its higher exposure to long steel.

The concern of potential imports of steel from Russia is overstated in our view. According to CBI, a Shanghai based consultancy, there have been orders from traders for Russian HRC, at China CIF price of USD440/t (USD45/t discount to local prices), for March-April delivery. However, the volume is 0.3 mn tonnes, which is 1% of 2008 China imports œ impact on domestic steel market should be limited in our view.

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