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)

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Sector: Commodities