On May 28, 2013, rebar futures mainstream 1310 contract closed at CNY 3479 per tonne, below the important mark of CNY 3500 per tonne, hitting another new record low.

 

Shanghai spot market encountered new low

A mixed performance was presented in domestic market as steel prices in northern regions was bolstered up by tight resources whistle South China experienced a continued decline as a result of EXW price cut and more rainy days, particularly a new low was seen in Shanghai market. Recently, Shagang, Yonggang, Zenith Steel and other steel mills based in East China have lowered wire rod ex-works price down CNY 30 per tonne and rebar CNY 50-80 per tonne, additionally providing CNY 30-50 per tonne subsidies for previous contracts.

 

In light of sharper drop in spot market compared to ex-works price, steel mills are still exposed to high pressure in downgrading their prices in future.

 

New crude steel production peak

Statistics from China Iron and Steel Association show that China's large and medium-sized steel mills have a daily crude steel production of 1.7481 million tonnes, up 2.71 percent compared with the last ten days of April, 2013. China's daily crude steel production is predicted to be 2.1929 million tonnes, an increase of 3.02 percent compared with the last ten days of April.

 

Sinking steel prices in recent days did not send any ripples through steel mills’ production enthusiasm.

Weakened impounding reservoir function of social inventories

 

Social stockpiles of rebar and wire rod totaled 8.4416 million tonnes and 2.369 million tonnes as of May 24, 2013 respectively, kept falling trend but at a slower rate. According to CISA, steel inventories at key steel mills amounted to 13.6805 million tonnes for mid May, climbing up 590,000 tonnes versus early May.

 

Against the background of sluggish market, steel traders took the initiative to destock and were not such active in placing orders as before. Given significantly diminished impounding reservoir function of rebar social inventories; the demand from end users would be directly mirrored by the amount of orders that steel traders are going to place. Anyway, narrowly improved downstream demand may not be able to reverse the overwhelming downward trend, which is lack of being financed.

 

Disappointing macro economic recovery

The flash HSBC Purchasing Managers' Index for May unexpectedly fell to 49.6, sliding below 50-mark that demarcates expansion from contraction for the first time in seven months as a sub-index measuring employment and new export orders have been staying under 50-point level for two consecutive months. In addition, the output index reached a three-month low and output price index has been sliding for the fifth straight month. These economic indicators demonstrated continued lackluster demand both at home and abroad as well as poor recovery of macro-economy.

 

Historical experience tells us traditional robust downstream steel consumption season (April-May) in China would gradually taper off at the start of June, but this time it comes earlier than previous years.

 

In sum, despite sustained advancing actual demand of rebar, the slowly recovering pace lead us to a fully exhausted spot market. In light of twin drags of high production and inventory at steel mills, domestic steel price would maintain vulnerable amid fluctuation, coupled with weak balance between supply and demand.