By Min Zhang and Gavin Maguire
BEIJING/SINGAPORE (Reuters) – China’s army of steel processors and investors has gone from buyers to distributors amid a sharp drop in economic activity at the world’s largest manufacturer, heralding a cautionary sign for steel, aluminum and other key commercial products.
Chinese buyers were the global spike in steel prices from mid-2020 to the end of 2021, as they traveled around the world in search of minerals and steels to power their gigantic trading engine and accumulate inventories in anticipation of additional price increases.
This number of orders has been reversed since March, as recurrent outbreaks of COVID-19 have led to prolonged closures of plants and stores, stifling purchases of metal-intensive products, from cars to appliances, and putting pressure on the prices of production inputs.
Metal futures illustrate the selling pressure. Futures curves for aluminum, zinc, metal rebar and iron ore show that costs tend to fall for the remainder of 2022.
(Graphics: https://fingfx. thomsonreuters. com/gfx/ce/klvykoblevg/ChinaMetalsCurvesMay2022. png)
Weakness in the structural sector, which accounts for about a share of all metal and about 30 percent of the aluminum used in China, has further undermined confidence in the metals sector, leading some processors and trading companies to sell shares in a declining domestic market rather than hoard them. for subsequent sale to end users.
“The downstream call was continuously postponed during the pandemic outbreak cycle across the country. Some other people said it could resume in July, but the rainy season will come then,” said Qi Xiaoliang, a Beijing-based metal trader.
Shortly after keeping its metal inventory depreciating until demand recovered, Qi began selling shares at 150-200 yuan ($22. 56-30. 09) under its acquisition costs.
Other intermediate steel manufacturers have followed suit, reversing typical industry patterns and tarnishing the near-term outlook for steel demand in China.
(Graphics: https://fingfx. thomsonreuters. com/gfx/ce/lbpgndzmavq/3YearMetalsPricePerfChina. png)
“The factor is complex because China is an exporter of some metals, such as metal and aluminum, and an importer of others, such as nickel, copper and battery metals,” John Johnson, managing director of CRU China, told Reuters.
“Short-term adjustments in demand and relative costs would possibly temporarily adjust those margin flows, but China is unlikely to replace its long-term strategy of adding price to exports. “
DELAYED STIMULUS
Beijing has put forward a number of measures ranging from reducing benchmark lending rates to allowing loan delays to mitigate the blow of the economic slowdown, but its commitment to a zero COVID policy has prevented more direct measures to reinvigorate economic activity.
“Supportive policy measures in China have yet to compensate for the strict measures opposed to COVID-19. Loans and key signs of real estate are weak,” anz Research analysts said.
Closures and movement restrictions have reduced factory and structural activity just as it peaks, depriving steelmakers of a key window to sell their products.
(Graphics: https://fingfx. thomsonreuters. com/gfx/ce/znpneoxrjvl/metalproduction. png)
Production of several key metal-intensive products, from shipping boxes to refrigerators, has lagged behind the 2021 production speed and is expected to remain low as long as movement restrictions are maintained.
Similarly, the structural sites that are buzzing as summer approaches are now largely desolate as staff remain at home.
(Graphics: https://fingfx. thomsonreuters. com/gfx/ce/lbvgndlaepq/output0524. png)
The credit crisis in the real estate sector has stifled structure activity, with a fall in new structure of 26. 3% year-on-year in the first 4 months.
This has led to a relief in the demand for metals in appliances, plumbing and wiring. The amount of copper used in appliances is expected to decline about 2% in 2022 from 1. 79 million tonnes last year, according to Che Guojun, an analyst at state-owned consultancy Antaike.
Vehicle production and sales have fallen in the world’s largest automotive market. As a result, the production of automotive plates of the main manufacturer Beijing Shougang Co Ltd fell by 17. 6% in January-April compared to the same time of the previous year.
Reflecting slowing demand, inventories of metal products have withstood their classic drop since the end of the Lunar New Year holiday, up 9. 4% from a year earlier on May 19, according to Reuters calculations based on data from consultancy Mymetal.
(Graphics: https://fingfx. thomsonreuters. com/gfx/ce/gkvlgzlodpb/steelstocks. png)
Reacting to the slowdown in China, Goldman Sachs lowered its 2022 expansion forecast to 4%, versus China’s official target of around 5. 5%.
“While infrastructure stimulus is expected to be broadly positive for demand for raw curtains, we believe its net impact deserves to be a little smaller. . . because the projects may be less extensive than in the past. “the bank said in a recent note to customers.
BRIGHT SPOT
While most primary commercial products are affected by the slowdown in use in China, analysts remain more optimistic about some specialty products.
“New electric cars and batteries are still developing strongly and are waiting for the call to recover. . . sentiment towards the new energy sector remains promising,” said Yu Mengxue, an analyst at Shanghai Dalu Futures.
Others expect that call to the will build up later in the year with Beijing’s promise to stabilize the economy.
“The government has worked in the past, the advantages of getting accurate are difficult to determine, but we are hopeful,” said Malan Wu, director of studies at Wood Mackenzie.
($1 = 6. 6475 Chinese yuan)
(Reporting through Min Zhang in Beijing and Gavin Maguire in Singapore; Edited via Sonali Desai)