Steel: Yet To Bottom Out

We expect the recent uptick in MEPS Carbon Steel price to lose steam over the coming months. Currently trading at US$716/tonne, steel prices have risen 5.4% since hitting a multi-year low of US$679/tonne in July 2013. However, we believe further downside is on the cards over the medium term. We forecast steel prices to fall from an average of US$708/tonne in 2013 to US$695/tonne in 2014.

While it is hard to ascertain the current production balance in the steel market (as data on monthly crude steel consumption is not available), we primarily attribute the recent uptick in steel prices to a revival in Chinese and US steel demand. According to the latest trade data, imports of steel products by China increased 17.0% year-on-year (y-o-y) in November while that of the US surged 17.4% y-o-y in October. On the other hand, steel export growth in China reached -3.1% y-o-y in November and -4.6% y-o-y for the US in October. This suggests that steel imports by China and the US are being consumed domestically, rather than re-directed towards the seaborne market.

In a sign of strong domestic steel demand, Chinese steel production and imports of iron ore continued to register strong growth prints in recent months. According to China Customs General Administration, Chinese steel production expanded by 5.9% year-on-year (y-o-y) in November, while imports of iron ore rose 18.3% y-o-y.

Limited Upside
MEPS Carbon Steel Product Composite Price (monthly chart, US$/tonne)

Steel: Yet To Bottom Out

We expect the recent uptick in MEPS Carbon Steel price to lose steam over the coming months. Currently trading at US$716/tonne, steel prices have risen 5.4% since hitting a multi-year low of US$679/tonne in July 2013. However, we believe further downside is on the cards over the medium term. We forecast steel prices to fall from an average of US$708/tonne in 2013 to US$695/tonne in 2014.

Limited Upside
MEPS Carbon Steel Product Composite Price (monthly chart, US$/tonne)

While it is hard to ascertain the current production balance in the steel market (as data on monthly crude steel consumption is not available), we primarily attribute the recent uptick in steel prices to a revival in Chinese and US steel demand. According to the latest trade data, imports of steel products by China increased 17.0% year-on-year (y-o-y) in November while that of the US surged 17.4% y-o-y in October. On the other hand, steel export growth in China reached -3.1% y-o-y in November and -4.6% y-o-y for the US in October. This suggests that steel imports by China and the US are being consumed domestically, rather than re-directed towards the seaborne market.

Chinese Import Growth To Slow
Steel Imports - By Country (LHS) & Imports By Select Countries (% chg y-o-y, RHS)

In a sign of strong domestic steel demand, Chinese steel production and imports of iron ore continued to register strong growth prints in recent months. According to China Customs General Administration, Chinese steel production expanded by 5.9% year-on-year (y-o-y) in November, while imports of iron ore rose 18.3% y-o-y.

The key reason for our downbeat view on steel prices is our expectation for Chinese demand growth to falter in 2014 as the structural deceleration of the Chinese economy comes back into focus. Although China only accounted for 3.5% of global steel imports in 2012, a sharp slowdown in domestic consumption growth would be a drag on steel prices.

Chinese Export Strong In 2013
Select Countries - Steel Exports (% chg y-o-y)

We believe improving demand in major steel-consuming countries such as US and Japan will be insufficient to offset the supply glut in the steel industry over the medium term. Crucially, surplus Chinese supply will continue to bleed into the global market and delay the necessary consolidation of China's bloated production base. On a cumulative basis, Chinese steel exports jumped 12.4% y-o-y in the first eleven months of 2013. Rising steel exports from China will take the wind out of the recent uptick in steel prices, with a growing number of steelmakers struggling to cope with excess capacity. Indeed, the global steel capacity utilisation rate has yet to break above 80% (the point at which steel mills traditionally achieve price increases) despite higher output growth in recent months.

China To Drive Global Steel Glut
Select Countries - Steel Production (% chg y-o-y, LHS) & Steel Production As % of Global Share (RHS)
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