Steel prices following the Chinese tune

Demand for steel has long been used to gauge economic activities and one can get a fair sense of progress a particular region or country is making as far infrastructure spending is concerned. China according to various estimates will contribute more than 30 percent towards global GDP growth which is expected to lag around 3.1 percent in 2017.

To cater to its own domestic demand, China tries to produce most of the commodities which includes steel. Over the years China was growing at about 8 percent and it was able to consume most of its own production. Now that growth has slowed and law of large numbers have caught up with China, a catch-22 situation has developed.

The Chinese government in its economic plans has stated that it wants to curb down production of steel which when announced took prices higher at the start of 2017. However, recently the Chinese central bank increased interest to put a lid on new housing projects. Data suggests that new housing projects and property spending has gone down but the steel output has remained same. Local authorities have shown reluctance to close down units fearing a backlash from out of job workers.

The stockpiles of steel in China have risen to highest level since 2004, while global and local manufacturing growth has slowed down. Steel looks to follow the same fate as oil which after a decent run has caught up with global growth reality.

Locally, manufacturers of Cold-Rolled steel and Galvanized steel managed to get anti-dumping duty imposed on products from China and Ukraine. Two companies, International Steel (PSX: ISL) and Aisha Steel (PSX: ASL) were the major beneficiaries and saw their stock prices jump considerably. Recently, both have seen enthusiasm slowing and the stock prices have corrected.

Investors have realized that betting on steel is not straight forward and there are various data points that need to be considered. For e.g. recently Cold-Rolled steel (CRC) prices went down internationally but Hot Rolled (HRC) steel which is used to make CRC, its price did not move down. Hence, giving the importers some room to trade.

In addition to the Chinese, steel mills in Russia are into their prime season after the winter hiatus and their prices are also very close to the Chinese rate as well. There is no anti-dumping on Russian products and we could see shipments from there anchoring on the Karachi port very soon. It would be interesting to see how local manufacturers plan their next move with so many variables to consider