Raw Steels MMI Up 3% As Chinese Prices Rebound

| About: iShares China (FXI)

Original Post

By Raul de Frutos

Our Raw Steels MMI rose by 2 points in July, thanks to the stabilization of Chinese steel prices. On the other hand, prices in U.S. remained flat for the second consecutive month, as this year's rally seems to be losing momentum.

Chinese Prices Up on Demand Growth

Chinese steel prices rose steeply earlier this year, but we saw a correction start in late April. However, following the downward pressure, steel prices in China rose in July. Last month, stability in Chinese steel prices seemed to be driven by improved demand.

Raw-Steels_Chart_August-2016_FNL

The Caixin Manufacturing PMI in China rose to 50.6, way above June's levels, and that easily beat expectations. It's the first time since 2015 that the index is in expansion (readings above 50) since February 2015. The country's real estate indicators have also improved this year. This demand improvement seems driven by the fiscal and monetary stimulus provided by the Chinese government, and the markets expect China to announce more stimulus measures.

The demand side of the equation looks solid, assuming China provides more stimulus, but the supply side is still a question mark.

China Not Cutting Capacity... Yet

The country cut 13 million metric tons of excess crude steel capacity in the first half of the year, less than a third of its annual target. In June, China exported 10.9 million metric tons of steel, a 21% increase from June 2015 and the second-highest total ever. The data raises questions on whether the demand growth is enough to absorb this much steel coming out of China without it weighing on prices.

However, China's vice industry minister said in July that the country will step up efforts to cut capacity in the second half. The minister pointed out that the focus of their work in the first half was mission planning, and in the second half they will step up the implementation and enter a new stage, from allocating targets and drawing policies to actually pushing capacity cuts

China's second- (Baosteel) and sixth-largest (Wuhan Iron & Steel Co.) Chinese steelmakers said last month that they were planning on restructuring (merging) together. While the two state-owned enterprises (SOEs) didn't provide any details on what that entailed, there are rumors that these companies may have been ordered by Beijing to take over all or a majority of the other amid a broader push to reduce the number of state-owned enterprises.

Rally in US Prices Cools Off

Meanwhile, in the U.S., prices struggled to build on previous gains. It's still unknown whether this price stabilization is a market top or just a pause before domestic prices continue to climb. That will likely depend on what the world's largest steel producer and consumer does in the second half. First, will China provide more stimulus and, therefore, more demand for steel? Second, will the country actually cut that steel capacity it promised? Lots of things to watch for in the second half...

Actual Steel Prices

The Chinese slab price rose 8% to 376 CNY per mt. US shredded scrap fell 3% to finish the month at $242 per mt. Chinese HRC surged 9% to 411 CNY per mt from 377 CNY a month ago. The U.S. HRC futures contract declined 2% to $566 per mt.