Chinese long product prices may fall as inventories rise

Although long product prices in the Chinese domestic market continued to be boosted by the mills' prices during the past week, traders' expectations differ greatly as regards the future trend of the market given the sluggish levels of commercial activity and increased inventories. If market inventories continue to go up, long product prices in China are likely to fall in the near future.

Following the considerable upward adjustments made by Hebei Steel Group to its construction steel prices during the end of the previous week, most construction steel producers in China have in succession also raised their ex-factory prices. Moreover, the rebar price in the Chinese futures market again hit a new high in the past week, thus also helping to stimulate the enthusiasm of the spot market. Last week, China's domestic long product prices continued to rise sharply.

However, despite the climb in long product prices, demand in the domestic market has appeared slack, with trading activities in most regions becoming sluggish and inventory levels posting a rising trend. By the end of July 17, total rebar inventory in all sample warehouses in China amounted to 3.25249 million mt, up 47,760 mt week on week, while wire rod inventory reached 917,400 mt, up 38,200 mt week on week.

In Beijing and other northern markets, with an obvious drop observed in the trading volume over the past week, local traders intended to sell their products at lower price levels. However, due to the increased ex-factory prices from mills, traders found themselves obliged to hike their prices in spite of the bearish trading performance. Currently, traders' expectations differ greatly as regards the future trend of the market. By the end of the past week, rebar inventory in Beijing totaled at 212,300 mt, up 4,960 mt week on week.

Meanwhile, market prices in Shanghai, Hangzhou and other eastern regions remained on an uptrend during the past week, accompanied by increasingly slack market trading. Coming up to the end of the week, with some softness seen in the Shanghai market, some traders became increasingly uncertain about the future and lowered their prices on their own initiative so as to stimulate sales. By the end of the week, rebar inventory in Shanghai totaled 300,000 mt and wire rod inventory reached 67,000 mt, up 3,000 mt and 6,000 mt respectively week on week.

In the south, considering the hiked ex-factory prices from Shaoguan Steel and Guangzhou Steel as well as the impacts of the markets in the northern and eastern regions, quotation levels in the local market moved up by a certain margin in the past week. Nevertheless, end-side buyers seem to be resisting the continuous rise in the recent market, leading to flat trading levels on the whole. By the end of the week, rebar inventory in Guangzhou totaled 364,000 mt and wire rod inventory reached 128,000 mt, up 14,000 mt and 21,000 mt respectively week on week.

Last week, rebar price in the Chinese futures market surged strongly by RMB 109/mt or 2.79 percent. With the main contract hitting a new high at RMB 4,047/mt, the trading volume amounted to 12.25 million mt for the whole week, indicating an active situation in the market.

Overall, it remains to be observed whether downstream demand will follow the ascension of the market. Once demand posts a significant contraction, long product prices will inevitably drop down.