Domestic hot-rolled coil (HRC) prices have unusually fallen below rebar prices since 10 August. HRC demand has been dampened by a slowdown in China's manufacturing sector, where year-on-year growth has slipped to 6pc in June and July from 6.8pc in May. Slower automobile output and sales growth in July may signal a further weakening of flat steel demand in the industrial sector.
China's real estate investment and new project starts have grown quickly this year, with investment growth rebounding above 10pc in January-July after slipping to 9.7pc in January-June. Home price gains in second and third-tier cities have fuelled the real estate boom, after Beijing clamped down on new home sales in first-tier cities last year. A monthly survey of 70 cities by the national bureau of statistics showed increase in new home prices in 65 cities in July compared with 63 in June.
The government has increased credit availability to shore up economic activity as it looks to counter the impact of US tariffs on Chinese products. This could add to steel demand in the second half of the year.
China's finance ministry yesterday asked financial institutions to speed up their issuance of special bonds worth about Yn1.35 trillion to provincial governments, mostly to fund infrastructure projects. Beijing is seeking to increase China's infrastructure sector growth, which slowed to 5.7pc in January-July from 19pc in 2017.
Credit disbursal by banks has significantly accelerated over the past two months. Chinese banks loaned Yn1.45 trillion in July, up by Yn627.8bn from a year earlier. M2, a broad measure of money supply that covers cash in circulation and deposits, rose by 8.5pc year on year to Yn177.62 trillion at the end of July. Real estate demand is closely linked to credit availability, taking around 44pc of the total loans disbursed in July.
The real estate and infrastructure sectors account for around 60pc of China's total steel consumption.
China's monthly crude steel output rose above 80mn t for the first time in May and then stayed above this level in June and July. But some of these gains could simply be from better reporting of data. China shut down around 140mn t/yr of crude steel capacity last year through the elimination of scrap-fed induction furnaces, which often operated illegally or were too small to be included in official data. The transfer of these producers' market share to legitimate mills may have improved the reporting of output.
Environmental restrictions continue to curb steel production in Tangshan, which accounted for 11pc of China's total crude steel output in 2017. Blast furnace output cuts of up to 50pc have been enforced in the city from 20 July to 31 August in an attempt to curb emissions. These cuts come on top of a 10pc reduction in pig iron output in Tangshan enforced from April. Handan, another major steel-producing city in Hebei province, imposed a 25pc cut in pig iron output from April. Maintenance shutdowns ahead of the busy September and October months likely cut steel output by 260,000t in the first 10 days of this month.
Rebar stocks in China's major markets fell sharply in July and have continued to decline this month, indicating that supply has not been able to keep pace with demand, even in the current off-season month of August.
Steel prices are likely to remain strong in September and October, although occasional price corrections may occur. China's construction activity peaks over the next two months before slowing in the winter, especially in the north.
Winter blast furnace output cuts of 30-50pc will be enforced in 28 north China cities from 1 October, much earlier than the 15 November start date last year. The cuts will stay in place until 31 March, rather than 15 March last year. And cities in Jiangsu, Shaanxi and Shanxi provinces may face production cuts this year, unlike last year when cuts were mostly limited to Hebei, Shandong and Tianjin.
Real estate activity is widely expected to slow in the winter months as Beijing may step up efforts to reduce dust, which adds significantly to smog in large cities. But if trends from last year hold, the drop in steel supplies may far outweigh the slowdown in demand and support steel prices through the winter months. Chinese analysts expect steel output cuts to be steeper this year, as north China mills are already using up to 25pc scrap charge in the basic oxygen furnace, limiting the extent to which they can use more scrap to make up for the shortage in pig iron output. And any extension of steel output cuts to Jiangsu, China's second-largest steelmaking province, would affect more supplies than last year.