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Good times gone: Slower business awaits Chinese steel mills in 2018

[SHANGHAI] China's steel demand will slow in 2018 as the world's second-largest economy reins in stimulus and tightens credit, ending a two-year bonanza for the world's biggest producers, analysts say.

Along with a recovery in Chinese steel supply after this winter's production curbs are lifted, that could spell downward moves for prices again, they said.

At one stage this year, Chinese steel prices were nearly triple 2015 levels. That surge was due to the government's tough environmental crackdown and winter output cuts, along with a campaign to tackle overcapacity and Beijing's infrastructure push that helped inflate profits at steelmakers to the highest in decades.

"The good times for the steel sector will be gone," said Wang Pei, founder of research firm Horizon Insights in Shanghai, speaking at an investment forum organised by commodities and financial services provider Puoke on Friday.

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"The steel industry's fundamentals will become weaker next year. Demand will slow down from the second quarter."

Despite another record year for bank lending in China, some analysts said the pace of broad credit expansion has been slowing due to the government's "de-risking" drive.

If the tightening campaign is sustained, and financing costs continue to slowly rise, analysts polled by Reuters estimate China's economic growth will cool to around 6.6 per cent this quarter and 6.4 per cent in 2018, from a forecast-beating 6.9 per cent in the first nine months of the year.

"The economic stimulus measures will be weaker with gradual tightening in credit next year, so I am bearish generally on commodities," said Wang Bing, chairman of Shanghai LC Assets Management Co Ltd, speaking at a separate forum on Thursday.

As demand softens, China's steel supply will also increase next year when the Beijing-ordered winter curbs are lifted in March. New steelmaking capacity, using steel scrap, of about 30 million tonnes is also expected to come on stream next year, analysts say.

China has imposed industrial output curbs during the cold season to fight smog, helping reduce steel inventories among traders to the lowest in at least six years, based on data tracked by SteelHome consultancy. The restrictions are in place from Nov 15 to March 15.

Tighter supply plus firm demand particularly from southern China have helped increase gross profit margins at some steelmakers to up to 2,000 yuan (S$407) a tonne last month, the highest in about two decades, according to analysts.

"Such high profit at steel mills will be unsustainable and will gradually go lower as supply recovers," said Du Hui, chief steel analyst at Zhongtai Securities.

REUTERS

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