“However, a sharp and rapid drop in prices is not necessarily a bad thing, because this is the only way to reduce the price of raw materials and force steel producers to cut production,” Wang said. “This could lay a stronger foundation for a subsequent price recovery,” he added.
As of April 28, the price of composite steel in China, according to Mysteel, is at a more than four-month low of 4,128 yuan per ton (598.2 US dollars per ton), having fallen by 380.2 yuan per ton since March 31.
Wang noted that a slower-than-expected recovery in steel demand from the domestic construction industry was the main drag on steel prices in China last month.
The Purchasing Managers' Index (PMI), which tracks new orders in China's construction industry, stood at 50.2 in March, down 11.9 basis points from the previous month, according to data released by the country's National Bureau of Statistics (NBS).
“The figure this time was very abnormal because the new orders index usually rose to well over 50 in March,” Wang said. The fall in the new PMI of orders foreshadowed weak growth in steel demand in the coming months, so last month's drop in prices should not come as a surprise, he said.
Meanwhile, Wang said strong manufacturing performance by Chinese steel companies was also putting pressure on prices. NBS data released in mid-April showed that China's average daily steel production in March averaged 3.09 million tons per day, a new monthly high since June 2022.
“This means that the annual output of crude steel this year will be 1.12 billion tons, which far exceeds the market's capacity for consumption,” Wang said.
As Mysteel Global learned, the discrepancy between actual supply and demand caused pessimism in the steel market and forced domestic plants to reduce production. However, the current production cuts are not enough, Wang warned.
As of April 26, more than 40 Chinese steelmakers have announced plans to shut down blast furnaces for maintenance, according to Mysteel tracking. If the units are shut down as planned, total pig iron production among the 247 steel mills included in the sample will drop to around 2.38 Mt/d in May, down by about 70,000 t/d from the previous month.
“But steel prices will not receive firm support until daily production falls below 2.33 million tons per day,” Wang said. “Reducing steel production is now like squeezing toothpaste out of a tube – too slow to stop the fall in steel prices,” he suggested.
In this scenario, prices for most steel products are likely to continue to fall until they approach their lowest levels in two years, Wang predicts. Just this week, the national price of HRB400E 20mm rebar in China fell to 3,859 yuan per ton on May 4, a new low since October 30, 2020, according to Mysteel estimates.
“The likelihood that domestic steel demand will show any noticeable improvement in May is small, so steel mills must cut production more intensively if they want to see a sustainable recovery in steel prices,” Wang said. “The plants will not be able to make a decent profit until the demand and supply for steel are back in balance,” he said.
