Chinese long product inventories fall sharply

China's long steel output has slipped down recently as a result of the sharp drop in steel prices. Meanwhile, demand has begun to register a gradual release with the coming of the spring season. Last week, trading activities in the various regions observed certain improvements, with a rapid expansion recorded in the trading volume in some individual regions. Consequently, market inventory levels for long products have dropped considerably, while prices have also posted a moderate bounce. Some observers think that the Chinese long products market may already be emerging from its most difficult period in the first half of 2009.

Although domestic long product prices continued to go down in the past week, some regional markets registered a certain rebound under the influence of the recovery in levels of commercial activity; for example, market prices in Beijing have stepped up by a relatively big margin.

With China entering what is usually the busiest season for construction work, many projects have recently commenced construction work, leading to increased purchases and improved trading performances in the various regions. However, still in the shadow of the previous slump, traders are very cautious on the issue of raising their prices. In Beijing, due in particular to the large trading volume, traders hiked their prices to test the market, and this had the result of driving up prices in surrounding areas.

Following the rapid expansion of the trading volume in the past week, inventory levels in the various regions have fallen remarkably. According to the latest statistics, by the end of last week, rebar inventory in Shanghai amounted to 452,000 mt, down 65,000 mt week on week; wire rod inventory totaled 117,000 mt, down 3,000 mt. Finally in Beijing, rebar inventory decreased 49,800 mt to 309,700 mt, with wire rod inventory in Beijing down 1,100 mt to 132,700 mt.

In addition, the current low price levels have also curbed the release of capacity by the mills. According to the preliminary statistics from the China Iron and Steel Association, crude steel production of large and medium-scale steelmakers in China totaled about 10.95 million mt for the early March period (March 1-10), while overall national crude steel production came to around 13.78 million mt in this period. Thus, China's daily output of crude steel in early March reached 1.378 million mt, down 40,000 mt month on month, the first month-on-month decline registered this year.

Overall, improved trading levels and reduced production are the major factors which contributed to the sharp drop in inventory over the past week. If this trend continues, then the market is expected to post upward movement in the future. Nevertheless, since current market inventories are still high and mills' production cuts are not deemed to be sufficient, the market has not yet recovered its optimism. Over the coming week the market is unlikely to jump up sharply in the short term, but is expected in the main to fluctuate at bottom levels.