Prospects slightly less rosy for Chinese longs market in July

The Chinese long products market has in general been characterized by a strong uptrend during the past week. The only exception is the eastern China market which saw a considerable drop during the same week. If demand in China's long product market fails to register a sufficient expansion, then the eastern market is likely to indicate the strongest fall, followed by the other regional markets.

Looking back at China's domestic longs market performance in June, the average total increase during the period in question has reached RMB 260/mt ($38/mt) - the highest monthly increase so far in 2009. This strong rise in China's domestic long products market in June mainly resulted from the following five factors:

Firstly, stimulated by Baosteel's considerable hikes to its flats prices for July, other Chinese mills made successive upward adjustments to their prices in the month of June, thus pushing market prices up significantly.

Secondly, longs inventory in China has consistently fluctuated at low levels in June, with the supply shortages of certain specifications providing support for market prices.

Thirdly, China's Central Commission for Inspection of Discipline recently urged the relevant departments to accelerate construction works on the central government's investment projects, thus generating support from real demand for the upward movement of the market.

Fourthly, according to the central bank figures, China's new loans in the January-April period exceeded RMB 5 trillion, while in the month of May new loans reached RMB 664.5 billion, up RMB 72.7 billion compared with the previous month. Considering the steady recovery in the real estate sales volume, loans issued in June will surely exceed those issued in May. Thus, China's loose monetary policy has been aiding the steady upward movement of the current market.

Finally, under the combined effects of mills' increased prices, sufficient capital availability and improved growth in fixed assets investment, traders became increasingly optimistic as regards the market's prospects.

Although the domestic market registered a considerable rise in June, the picture for the month of July may not be so rosy.

According to the latest production schedules, China's key mills were scheduled to produce 8.1494 million mt of rebar and 5.2677 million mt of wire rod in June - the highest levels so far in 2009. However, once demand growth slows down and prices lack momentum to go up further, excessive production capacity will pose a threat to the construction steel market.

Generally speaking, in July China's longs market will be affected to a significant degree by supply pressure generated by the capacity release seen in June. Meanwhile, the rising trend of raw material costs will not change in the short term, and will remain a powerful source of support for the market. As regards demand, the market is unlikely to see any improvement on the demand side. Meanwhile, faced with ascending prices, players have gradually become more cautious as regards trading activities.

Overall, the situation of China's long products market looks like being less positive in July as compared to June. However, given the forceful stimulus measures implemented by the Chinese government, the downward room for market prices appears to be limited.