BEIJING: Warnings are stacking up fast after China’s eye-popping steel rally. Fitch Ratings Inc said prices lifted in part by heightened speculation are destined to slump, while a bank in Singapore flagged the risk of a boom-bust cycle reminiscent of China’s equity market.
The rapid advance wasn’t sustainable as mills were expected to bring back idled capacity, raising supply, Fitch said in a report. Price gains have been driven by a seasonal recovery in activity that has been exacerbated by increased speculation in the futures market, according to analyst Laura Zhai.
Steel prices have surged in 2016, with reinforcement-bar up 47%, after policymakers in China talked up growth and added stimulus, helping to lift property prices and ignite a speculative frenzy. The gains have helped to restore mills’ profitability, boosting their incentive to increase output.
Singapore-based Oversea-Chinese Banking Corp warned yesterday that there may be parallels between the sudden jump in steel trading and last year’s performance in equities, citing the potential for a boom-bust scenario.
“The rapid increase in Chinese steel prices so far this year is not sustainable, as it is largely due to a seasonal pick-up in construction and elevated speculation in the steel futures market,” Fitch said. “With prices now surging, many of the suspended plants have resumed production.”
Futures for rebar extended gains in after-hours trade last Friday, rallying as much as 6.2% to 2,781 yuan (US$427) a tonne on the Shanghai Futures Exchange (SHFE), before trading 0.4% higher yesterday. The price of the product used to strengthen concrete advanced for an 11th week through Friday, adding 14%.
Steel output in the world’s largest supplier may see a further increase this month as more furnaces are fired up, according to Fitch. Production in March rose 2.9% to a record 70.65 million tonnes from a year earlier, according to figures from the National Bureau of Statistics.
To cool the spike in trading, the SHFE last week increased transaction fees, while the Dalian Commodity Exchange, which has an iron ore contract, raised margin requirements. The bourse in Dalian also tightened rules on what it called abnormal trading, which now includes frequent submission and withdrawal of orders.
The surge in prices, which also included hot-rolled coil, has unfolded against a backdrop of lower-than-usual inventories after mills cut output last year. China’s rebar inventory shrank 7.3% last week to 4.32 million tonnes as of April 22, according to Shanghai Steelhome Information Technology Co. This time last year, it was at 6.66 million tonnes. — Bloomberg