China Commodity Call --Record steel production but still destocking Macquarie Research,

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China Commodity Call
Record steel production but still destocking
 China’s steel production hit another record high in June, and with reported
trader inventory still falling and prices recovering after some recent softness,
end use demand still appears robust for now.
Another record production number…
 According to data from the NBS, China produced 59.9mt of steel in June,
equivalent to 729mtpa (+11.9% YoY, +2.8 % MoM). Factoring in the steel
trade data published earlier in the week, China's apparent consumption of
steel hit 688mtpa in June (+15.5% YoY, +3.4 % MoM) – another record.
…but still inventory is falling
 By June, the level of deliverable inventory had fallen 20% YoY on a weeks of
use basis on our estimates, while apparent consumption of steel has risen
9.2% YoY. Adding in an estimate for the level of destocking at traders and
mills, we believe real demand for steel rose by 13.7% in 1Q11 and 14.3% in
2Q11. This would put real demand for steel roughly in line with IP growth and
above GDP growth for 1H11 (which fits with the historical trends).
Inventory is also low upstream
 With iron ore imports drifting down over the year, Chinese mills have
struggled to secure supply to both build inventory and produce at high run
rates. Data from a survey of 50 smaller mills in China shows that inventory of
ore was run down to below 30 days of use over June.
Domestic ore production is stepping up to fill the seaborne
gap
 A further consequence of falling imports and falling iron content of what is
being imported (see Commodities Comment, 8 June 2011, Appreciating iron
ore degradation) has been a sharp rise in dependency on China’s own
domestically produced iron ore concentrates. We estimate that China’s
domestic ore production is now running at the highest levels since mid-2008.
Pricing arbitrage effect evident in China’s preliminary June
trade
 We also review Chinese preliminary trade data for June, which reinforces that
price arbitrage remains a key factor in determining China’s call on
international markets.