Goldman says steel curbs in China are masking weaker demand

[SINGAPORE] A steel supply shock from mills cutting output in China will probably be short-lived as the country's demand is still on track to shrink, according to Goldman Sachs Group Inc.

Some mills were ordered to cut production before and during an international conference in Tangshan set for June 16-20, which may lead to a loss of 1.3 million metric tons of crude steel production, the bank said in a report received Thursday.

Beyond that, steel demand is weakening as the effects of credit- led stimulus have largely worn off, Goldman said.

"While we think the supply shock would be short-term in nature, the impact could be material in that it would impose a production loss," analysts Amber Cai and Christian Lelong wrote.

"However, looking beyond the conference, we see limited downstream activity to support steel prices."

Steel prices in China flipped from bull to bear market in May following a slump of about 30 per cent in Shanghai benchmark futures for reinforcement bar from their April high. The collapse came after exchanges stepped in to cool excessive speculation and as supply expanded. Mills fired up capacity in response to improved demand spurred by a credit boom and government stimulus.

Crude steel output in China was 70.5 million tons last month, 1.6 per cent higher than April, the statistics bureau said on Monday. The figure is just below March's record 70.65 million tons and brings the total for the first five months to 330 million tons, down 1.4 per cent on year.

China accounts for about half global supply of the metal used in everything from cars to skyscrapers.

"The outlook for new orders remains weak in June and daily production rates appear to have fallen from their recent peak," the analysts wrote. "Near-term uncertainty masks weakening steel demand."

The government's plans to halt sintering plants and blast furnaces is bearish for iron ore. The raw material with 62 per cent content added 0.2 per cent to US$50.65 a dry ton on Wednesday after tumbling 4.4 per cent a day earlier, according to Metal Bulletin Ltd. That's well shy of April's high of US$70.46 a ton.

As China's steel demand weakens into the second half, exports of iron ore are set to increase further, potentially swelling a glut, according to Goldman. The world's largest miners will continue to expand shipment volumes in the third quarter, adding about 10 million tons to the seaborne market, while minor producers are also expected to boost exports, the bank estimates.

While Goldman raised its output forecast for Citic Ltd's Sino Iron project in Western Australia to 15 million tons from 12 million this year, it said the new Roy Hill development backed by Gina Rinehart is behind schedule. Roy Hill may produce less than the bank's forecast of 20 million tons if problems with the mine's logistics continue.

China's domestic mines appear to be more resilient, as production is expanding from a year ago for the first time in two years, according to Goldman.

"This modest increase in domestic output will compete with imported ore and is likely to add pressure on seaborne prices in the second half," the bank said.

BLOOMBERG