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The steel market will be cold or will start a new round of destocking
Due to the impact of the Spring Festival holiday, the domestic steel market experienced a weak start to the year. Steel shipments dropped sharply, and manufacturer inventories continued to rise. According to the China Steel Purchasing Federation (also known as the China Federation of Materials), the January 2014 Steel PMI index was 40.7%, marking the fifth consecutive month below the 50% threshold, indicating contraction in the sector.
Industry insiders suggested that while the steel market may see some improvement in February, a more significant demand peak is expected in March and April as construction activity picks up. However, with high inventory levels and limited demand, steel prices are likely to remain sluggish in the short term.
Since mid-December 2013, the domestic steel market has entered an off-season, with demand hitting a "freezing point." Trading volumes have declined significantly, and the market has been in this low phase for nearly 10 months. Despite a slight decrease in inventory at the end of January compared to December 2013, the year-on-year increase remains high at 25.7%. This is attributed to production cuts and price reductions by steel mills, which led to a sharp drop in early January inventories.
However, according to MySteel Network, post-holiday inventories of five major steel products in key cities rose by 2.29 million tons compared to the previous statistics. Rebar saw the largest increase, accounting for 78.2% of the total, which is 3.6 percentage points higher than the same period last year. Analysts noted that this surge in inventory, combined with falling raw material prices, has weakened steel price support.
Qiu Yuecheng, a steel analyst from Xiben Shinkansen, pointed out that the current inventory levels are much higher than the same period last year, suggesting a severe order situation. He warned that if financial pressure continues, steel mills might initiate another wave of inventory reduction, further increasing supply pressure in the market.
The January 2014 Steel PMI index fell sharply by 7 percentage points to 40.7%, down from 49.2% in September 2013. Both production volume and new orders declined significantly, while finished goods inventory rebounded. The China Federation of Materials also highlighted that the slow start of construction activity after the Spring Festival, along with traditional trading practices, will keep steel demand subdued in February.
High inventories stem from weak demand, exacerbated by cold weather and festivals. During the Spring Festival, steel mills maintained normal production schedules, leading to stagnant shipments and accumulating stock. With weak demand and rising inventories, the market remains under pressure.
According to the China Iron and Steel Association, daily sales of 86 key steel enterprises in January were 1.288 million tons, a 3.48% decline from the first ten days of December 2013. Sales of long products dropped by 5.74%, while sheet and strip sales fell slightly by 0.17%. Steel prices also declined, with the average price of steel products dropping to 3,904 yuan/ton, a 2.11% decrease from the end of December 2013.
After the holiday, the domestic steel spot market remained flat, with futures markets showing declines. On February 7, coking coal, rebar, and iron ore all fell, reflecting weak market sentiment.
Analysts believe that with demand still not recovering and inventory pressures mounting, steel prices will remain under pressure in the short term. However, there is hope that with increased construction activity in March and April, the steel market could see a small demand peak, potentially leading to a price rebound.
Despite the current low price environment, many analysts caution that the market is still facing multiple negative factors, and steel prices could continue to fall. However, some experts remain optimistic about a potential recovery in March, depending on the pace of demand recovery and order fulfillment.
In conclusion, while steel prices are expected to remain weak in February, the coming months may bring some relief as construction activity resumes and demand gradually improves. Investors and traders should closely monitor the market for signs of recovery.