China reported record steel production in May ::Emkay

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China reported record steel production in May  

National Bureau of Statistics (NBS), China has reported Chinese May steel production all time high at 60.25 mt surpassing 59.87 mt recorded during January 2011 and up 7.8% YoY. Steel products production was reported at 76.37 mt, up 10.6% YoY. In the first five months of this year China's crude steel production totaled 290.35 mt, up 8.5% YoY, while steel products production aggregated 358.66 mt, up 12.3%.

Despite continuous rise in benchmark interest rates there has been no sign of slowdown in Chinese steel production so far. The daily production run rate however, fell slightly to 1.94 mt compared to 1.968 mt during May.

Interestingly exports from China fell during the same period, as evident from the following data.

So, is there any inventory build up? It does not seem so, as steel inventory has been falling gradually since early March from ~5.7 mt to 4.3 mt during second week of June.

This clearly indicates that there must have been higher consumption in China during this period. Apparent consumption of crude steel for May was 56.58 mt, up 8.7% over a year earlier and that of steel products was 72.89 mt, up 11.3%. During Jan.-May, 2011, apparent consumption of crude steel totaled 276.55 mt in, up 8% YoY. The same for steel products aggregated 345.45 mt, up 12%. The question is whether this can be maintained going forward. July has been a month of seasonally weak demand and thus, some moderation in demand can only bring down the production run rate in China.

As far as the raw material prices are concerned iron ore prices are still hovering at around US$175/ tonne due to higher imports by Chinato support its high steel production run rate.

On the other hand, iron ore inventory at Chinese ports has been on the continuous rise in anticipation of higher prices and reached ~94 mt as on 10th June 2011.

Our view

We believe, any slowdown in demand in China would put pressure on the global steel prices, as it may increase exports from China. On the positive side, this should also bring down the raw material prices especially iron ore. However, since Indian steel companies are not directly exposed to the global iron ore prices, they would not get the benefit of any correction in global iron ore prices.