China's domestic market flat prices low enough to stimulate traders to buy

SteelOrbis Shanghai The market prices of Chinese flat steel products continued to decline last week; reaching a low risk level. HR prices declined around RMB 80-105/mt ($10-13) and CR prices around RMB 200-250/mt ($25-31). Some domestic traders even began to purchase hot rolled products in the domestic market, expecting the price to rise after the slack season. Therefore, the decline in hot rolled product prices may stop completely soon. Furthermore, some foreign traders also began to show interest in Chinese hot rolled products. On the cold rolled side, price differences among various steel mills are quite large. Cold rolled product prices may continue dropping for a longer period than hot rolled products, due to the high price levels they reached earlier. Some traders, who think that they would obtain a good profit margin with the price increase in the end of third quarter and in the fourth quarter, will invest a high amount of capital in hot rolled products, which is another factor hinting that hot rolled product prices will become stable in the short term. However, the capital inflow will not be large for cold rolled products; therefore their prices are expected to see a slight decline next week. Meanwhile, the People's Bank of China (central bank) decided on July 21 to raise the deposit reserve rate of financial institutions - except rural credit cooperatives - by 0.5 percentage point. This is the second time for the Central Bank to hike the reserve rate in the last two months. It seems that China will further tighten the monetary policy, leading to further capital pressure on the steel industry. Looking into the domestic markets last week, the commercial activity was still flat when the hot rolled thick coil (thickness ≥ 5.5 mm) prices were at around RMB 3,500/mt ($439). There is still a great capital pressure on some traders, in addition to the soft market demand. Therefore, they had to lower their prices at a level sufficient to sell. On July 24, some traders in Shanghai gave up waiting and began to sell the hot rolled products they bought from the market earlier in order to stop their losses. Due to the increased inventory pressure, the traders of Liuzhou Steel in Lecong, Guangdong Province also lowered their prices by a big margin for sales promotion. Now the market price of hot rolled coil (thickness > 6 mm) from Liuzhou Steel is RMB 3,350/mt ($420). The cold rolled prices continued the downward trend from the previous week. With the rapid decrease in CR market, the cold rolled prices of some steel mills approached to hot rolled thin coil prices. For example, on July 24, Shanghai market price of 1.0 mm x 1,250 mm cold rolled coil from Tangshan Steel was about RMB 4,150/mt ($520), and that of 1.0 mm x 1,250 mm cold rolled coil from Handan Steel was about RMB 4,250/mt ($533). Currently, the production of steel mills is much higher than the downstream demand, as we are in the slack season for cold rolled products. Therefore, the market may seek balancing supply and demand through price decline.