HSBC sees over-supply continuing in China’s steel industry

HONG KONG – HSBC says China’s steel output continued to rise in May – a month in which steel prices retreated sharply - after hitting a record high production in April. “We believe mills’ profitability might have reached a year-high in April: expect market dynamics sto worsen,” HSBC warns.

“In March, HSBC estimated that 60% of the 100mt steel capacity closed in 2015 was just a temporary shutdown rather than permanent elimination, which means production resumes as soon as market conditions improve,” HSBC said.

“In line with this view, crude steel output reached a record-high of 69.4mt in April, equivalent to 847mt annually, following a continuous steel price rise since the beginning of the year.

“We expect May’s output to be even higher given that daily crude steel output from CISA members has climbed further, by 2% from early-May, hitting a new high of 1.75mtpd in mid-May.”

HSBC says steel prices retreated in May: China’s average spot HRC and rebar prices have fallen sharply, by 18% and 26% so far since the peak at end-April, as a result of mills’ increasing supply “and rather sluggish downstream demand”.

“Although futures prices briefly rebounded this week on possible production cuts in Hebei province, we believe oversupply will play its part in the coming few months, especially considering June-August is a traditionally slow season for steel demand.

“Therefore, we expect Chinese steel prices to remain under pressure amid oversupply going forward. Mills’ profitability might start to decline after April.”

HSBC said the CISA recently announced its member mills reported a total loss of RMB1.5 billion in in 4M16.  www.hsbc.com (ATI).