What is behind rebound in steel and iron ore markets in China in early July?

After a few weeks of constant declines, the local steel market in China as well as the main raw material market, for iron ore, have posted rebounding trends this week. The principal reasons for this have been the news which emerged about the better revenues of real estate companies in China in June, expectations for better support from the government after the third plenary session of the 20th CPC Central Committee scheduled to be held in Beijing on July 15-18, and the announcement of the Carbon Peak project in Tangshan. At the same time, there have been no changes in weak steel consumption in the country and in weak construction activities, while steel production has not declined either, and these factors raise concerns about how sustainable the current price uptrends is.

Real estate news

The first news which supported the market came on Monday, July 1, indicating that 60 percent of China's top 100 real estate developers posted increases in sales revenues in June month or month, while 30 percent of them even saw an improvement year on year. As a result, total sales revenues of the top 100 real estate developers rose by 36.3 percent on month in June, according to property researcher CRIC. Compared to June last year, the revenues were still down, by 16.7 percent, but better than the annual decline of 33.7 percent seen in May. This has positively affected the steel market and futures for steel and iron ore have been rising gradually since Monday.

However, real estate analysts are cautious and they say that the recent improvement is the first result of the package of supportive measures issued by the government announced in mid-May and the overall market is still far from even being stable. On June 26, Beijing set a lower minimum downpayment ratio for first-time home buyers at 20 percent, compared to the previous 30 percent. However, this will have a limited impact on the construction market, which relies mainly on movements in the third and fourth tier cities.

Tangshan chosen for Carbon Peak pilot plan

“Better expectations for the real estate industry and steel demand as a result of anticipated support from the government at the mid-July high-level meeting plus the Carbon Peak plan news in the Tangshan area have pushed up prices steadily. It is hoped that demand will recover after the rainy season in southern China, and then cost support will help this trend as well,” a Chinese trader said. A few other market sources have also confirmed that the recent news from Tangshan has come as a surprise and has had a bigger impact compared to the other developments.

On July 2, the document called "National Carbon Peak Pilot (Tangshan) Implementation Plan" was published by the local government, signaling that Tangshan has been chosen as the first city to implement the emissions plan and to reach a carbon peak by 2026 “encouraging steel enterprises to implement extreme energy efficiency transformation,” according to the document. The Chinese government has set a target to peak carbon dioxide emissions by 2030 and to achieve carbon neutralization by 2060 for the whole country. “The energy efficiency levels of steel and coking enterprises will have to be optimized, and the share of production capacity reaching the benchmark level will exceed 30 percent for BOFs, while the share of electric arc furnace steelmaking will reach about five percent,” the statement said.

At least two market sources said that this news will mean the steel production restrictions in Tangshan to optimize energy usage may be harsher already in H2 of this year. “Choosing Tangshan as a pilot city means that efforts in energy conservation, carbon reduction and production restrictions are expected to be much bigger than last year,” a trading source said.

Iron ore rises much faster than steel

But what about steel prices? As for now, the price uptrend has been shaky as it is still based on expectations rather than real market movements. Moreover, iron ore prices have been increasing at a higher pace, adding $7.4/mt over the past week, while rebar in the local market increased by RMB 40/mt. So, local steel prices are expected to keep gradually gaining as mills need margins. Additional increases of RMB 10-20/mt for rebar and HRC have been reported late this afternoon, July 3, by some sources.

Also, market sources said that local coking plants have asked for a second round of price increases, by RMB 50-55/mt, which may be implemented by Friday.

“I also think prices will be not as low as in June, but it is hard to raise them [steel prices] in the current conditions. Stable prices following iron ore, I think, is more realistic,” a large trader said.

SteelOrbis’ reference prices for major local steel products and iron ore in China, July 3