In March, domestic rebar prices were dragged down by negative news such as property market regulations and high inventory levels, leading to a steady decline that pushed prices below the 3800 yuan mark. According to on-the-ground reports, current site operations are underperforming, demand is sluggish, and companies are struggling to clear their stocks before the end of the year. The continuous influx of steel from mills has worsened stockpiling issues, while falling prices have led to visible losses for businesses. As a result, most traders are showing signs of panic, with a general belief that the market outlook remains weak.
Recent property market regulations, including the "New National Five" policies, have caused significant volatility in the real estate sector. The capital markets have been hit hard, and the secondary housing market has shown strong activity. However, prior to the implementation of these rules, the market remained uncertain and signals were mixed. While the impact of the new policies on market expectations is clear, it’s still possible that even stricter regulations could be introduced in the future.
According to statements from officials at the Ministry of Housing and Urban-Rural Development, local governments may introduce further regulations by the end of March this year. These rules are expected to include annual price control targets and residential land planning. Additionally, cities above the prefecture level are required to include eligible groups in housing support programs, which will be reflected in the policy framework.
The introduction of the New National Five policies caused a sharp drop in real estate stocks. This was partly due to overinterpretation of the regulations or market panic. In any case, the more stringent regulatory environment continues to weigh on the steel market.
China's crude steel output reached a record high in early 2013. According to the National Bureau of Statistics, the country produced 125.542 million tons of crude steel in the first two months of the year, a 10.6% increase compared to the same period last year. The average daily production of crude steel reached 2,212,300 tons, the highest ever recorded for this time of year.
Data also shows that the average daily crude steel output increased significantly from December 2012 to January–February 2013, rising by 14.32% to 2,126,300 tons. This surge has intensified the oversupply problem in the market.
Industry insiders suggest that some companies may have underreported production at the end of 2012 to meet energy-saving and tax obligations, only to make up for it in early 2013. This trend is likely contributing to the current supply pressure.
February 2013 saw a notable rise in steel production, especially considering the Chinese New Year holiday. The increase reflects steel mills' desire to capitalize on higher steel prices and sell more products. However, this surge in production has added to the supply pressure, causing steel prices to weaken after a brief rebound.
Steel inventories continue to rise, making price rebounds difficult. As of March 8, 2013, the total social inventory of the five major steel products across major markets reached 22,316,000 tons, marking 12 consecutive weeks of growth. Compared to the same period in 2012, the year-on-year increase was 3.652 million tons. Rebar inventory in major cities reached 10.7979 million tons, up 2.4096 million tons from the same period last year—a 28.73% increase.
Although growth in Central, Northwest, and East China has slowed, the overall upward trend persists. North China continues to see rapid inventory increases, putting strong downward pressure on prices despite some improvement in construction site procurement and urban transactions.
Over the past three years, the average time for steel inventories to be consumed has been around nine months. However, in recent years, both inventory levels and the rate of digestion have continued to rise, slowing down year by year. With the current pace of crude steel production, steel market inventories are expected to grow further, which is not favorable for a price recovery.
Environmental concerns could lead to production cuts. From March 13 to March 28, the environmental protection headquarters will conduct inspections on 128 key polluting enterprises in Tangshan. Market participants believe this move sends a strong signal to high-emission and high-energy-consuming enterprises to reduce or halt production. For a weak market, this could act as a temporary relief. Historically, events related to steel mill production have often triggered unexpected drops in steel prices. For example, in 2010, the Ministry of Industry and Information Technology announced the elimination of steel mills with less than 1 million tons of annual capacity, which was expected to reduce supply and stabilize prices. Similarly, in 2011, a spring drought affected hydropower and electricity supply, limiting production at some steel plants—though the impact was limited, the news fueled market speculation and contributed to price declines.
It remains to be seen whether the thorough inspections of the 128 key polluting enterprises in Tangshan in 2013 will trigger a price rebound.
In conclusion, the combination of high crude steel production and massive steel inventories has exacerbated the oversupply issue, which is likely to keep steel prices under pressure in the long term. However, with the RB1310 contract currently trading near 3700, having fallen over 7%, it's not advisable to chase the downside. After a potential rally, consider shorting near 3950 with a stop loss at 4000.
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