China's steel and iron ore prices have started to climb in response to winter production curbs, but recent gains are far from suggestive of a rosy outlook for the sector.
The catalyst for the rebound in prices would appear to be signs that the authorities in steel-making centres are starting to clamp down harder on air pollution, after earlier indications that this winter's output curbs wouldn't be as severe as those for the previous cold season.
Benchmark steel rebar in Shanghai closed on Dec. 14 at 3,427 yuan ($497) a tonne, up 3.7 percent from the close of Dec. 11, and 7.4 percent higher than a recent closing low of 3,192 yuan on Nov. 26.
Iron ore prices have come along for the ride, with 62-percent iron ore grade, as assessed by Argus Media, jumping 8.5 percent from a recent low on Nov. 27 to end at $70.05 a tonne on Dec. 14.
Steel rebar is still almost 14 percent below its 2018 peak, touched in late August, but the recent price action is suggestive of the view of those who think that output curbs will limit supply and that demand will remain relatively robust.
Certainly, there was early evidence of production curbs starting to play a role, with steel output falling to a seven-month low of 77.62 million tonnes in November, down from a record 82.55 million in October.
December output may be in the region of 66 million tonnes, if the forecast for total output for 2018 from the China Metallurgical Industry Planning and Research Institute, a government consultancy, is on the money.
The institute expects China's 2018 crude steel output to reach an all-time high of 923 million tonnes, with production in the first 11 months totalling 857.4 million tonnes, up 6.7 percent on the same period in 2017.
The record output for the year so far came amid strong demand earlier in the year and fat profit margins, but these factors have faded somewhat in recent weeks.
WORRYING DATA
Notwithstanding the rebound last week, steel prices and profit margins have narrowed since the August peak, while economic data has started to throw out some worrying demand signals for steel-intensive industries, such as construction and car manufacturing.
A slew of economic releases from China last week painted an economy struggling to maintain growth momentum in the face of a trade dispute with the administration of US President Donald Trump.
China's auto sales fell a sharp 10 percent in November from a year earlier, the steepest drop in nearly seven years.
Industrial output rose 5.4 percent year-on-year in November, missing analysts' estimates and matching the pace seen in January-February 2016. Factory output had been expected to grow 5.9 percent, unchanged from October's pace.
And retail sales gained 8.1 percent in November from a year earlier, below expectations for an 8.8 percent rise and the slowest since May 2003.
The economic tea leaves are hardly conducive to rising steel demand in 2019, meaning that any optimism around the sector currently is based on hopes that Beijing takes steps to stimulate the economy.
Any increased stimulus would likely be concentrated in infrastructure and construction, two sectors that are main drivers of steel demand.
Although it doesn't seem to make economic logic, a run of poor economic data can be viewed as positive for commodities in China, as past experience has been that the authorities open up the credit and spending taps, boosting demand for raw materials.
There is, of course, the risk that this cannot go on indefinitely, or that it will fail to deliver the same bang for the bucks as in previous years.
For now, it appears the recent uptick in steel and iron ore prices is largely built on hopes of stimulus once the winter production curbs are lifted.
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