China’s Steel Inventory Decline Slows

Rebar and HR inventory levels are currently high in China. While imported iron ore inventory levels remain flat y-y, increasing supply from Vale in Brazil should be noted. If expectations for China’s liquidity policy fade, it could lead to a drop in steel prices at yearend.

China`s steel distribution inventory up 28% y-y; iron ore inventory flay y-y

As of Oct 1, China’s steel inventory stood at 14.65mn tons (based on 35 cities), up 28.2% y-y. By item, rebar inventory (7.97mn tons) was up 59.4% y-y and HR inventory was up 11.7% y-y, while CR and heavy plate inventory levels were flat y-y. We note that when the survey area is expanded to 132 cities, rebar still leads the increase in distribution inventory, marking a 60.7% y-y jump.

In 2020, China’s steel inventory peaked at 26mn tons on Mar 13, before falling 43.7% through Oct 1. For comparison, the decline from annual peaks to early October in previous years stood at 36.5% in 2017, 44.8% in 2018, and 38.9% in 2019. Usually, Chinese steel inventory peaks around mid-February/mid-March, and a lowest point tends to come in early/mid-December. As such, distribution inventory is expected to slide for another two months.

Imported iron ore inventory in major Chinese ports amounted to 119.07mn tons on Sep 30, the lowest level since 106.5mn tons in 2016 (2017: 133.57mn; 2018: 145.17mn tons; 2019: 120.34mn tons). While imported iron ore inventory displays no distinct seasonal trends, excluding 2016 and 2018, it reached annual lows over July~November and then increased through yearend.

China’s steel inventory decline slows; iron ore inventory set to rise

China’s steel inventory has hovered around 15mn tons since Jun 16. Considering seasonal trends, distribution inventory is expected to fall until early December, but the decline should slow. Meanwhile, imported iron inventory in major Chinese ports is forecast to climb towards yearend. Along with a drop in temperature, a decline in crude steel production in China, a fall in iron ore demand, and an increase in supply from Brazil’s Vale will likely impact iron ore inventory. Vale has hinted that its iron ore production will total 310mn~320mn tons in 2020, which suggests that its production in 2H20 will increase 52% h-h.

China’s liquidity policy is also a major variable for the steel industry. In order to boost its economy, China lowered its Midterm Loan Facility (MLF) and Loan Prime Rate (LPR) from 3.25% and 4.15%, respectively, in January, to 2.95% and 3.85% in April. If expectations for further liquidity expansion decline, it could negatively impact financial conditions at steel companies and distributors.

Source : Business Korea