Steel Rebar Futures Lowest in Two Years Impacted by China’s Dynamic Zero-COVID Policy

Steel rebar futures fell to the lowest in two-years Monday at CNY 3,650 per tonne. Deepening recession fears and heavy losses in Chinese bonds and stocks following the reelection of President Xi. Steel rebar and Iron ore futures have been a clear leader from the early days of the raw materials rally. They are also the most volatile. Volatility is fed multiple things, the property sector, energy prices, interest rates, COVID policy and the ongoing trade war between the world’s biggest producer of iron ore, Australia and one of the biggest users, China.

China’s dynamic zero-COVID policy and unfavorable weather conditions for construction activity weighed on ferrous markets, along with fading hopes of further economic support. That outlook continues to overshadow markets.

Investment in the country’s giant property sector fell over 8% year-on-year in the first 9 months of 2022. The World Steel Association expects global steel demand to fall by 2.3% this year to 1.797 billion tonnes, a downward revision of 0.4 percentage points from its forecast in April.

Chinese markets quivered at Xi Jinping officially secured a third term as the Chinese Communist party’s head and unveiled a new leadership team packed with loyalists, a day after orchestrating the removal of former rival Li Keqiang from the party’s top ranks and further consolidating his grip on power. The reshuffle of the country’s Politburo signaled Xi’s stronger grasp over the country to enact policies that are not market friendly.

Xi’s controversial zero-Covid policy has dramatically slowed economic growth and made travelling in and out of China extremely difficult, with no significant relaxations in sight. There had been hopes for a more flexible policy, now the risk of further lockdowns still exists.

“It represents a massive consolidation of Xi’s power that is unprecedented since the Mao era,” said Neil Thomas, senior China analyst at the consultancy Eurasia Group.

Steel demand has been moderating as “China is stepping out of large-scale stimulus and seeking domestic consumption-led growth. China continues to seek alternatives to its heavy reliance on mostly foreign iron ore by encouraging imports of scrap steel imports. Much of this is part of a bullying attack on Australia. The reality is none of these factors will necessarily mean a collapse in iron ore prices, as lower steel production should raise prices and improve margins at mills, making more-efficient, less-polluting grades of the mineral more affordable.

Dalian iron ore hit this year’s peak at 948 yuan a tonne on June 6, while SGX iron ore had risen up to $168.65 a tonne on March 8, supported by hopes of additional stimulus for China’s struggling economy.

We have seen record prices and a series of wild swings, into a bear market and then returned to a bull market in about a month as China tried to bully Australia and talk down commodity prices.  Iron ore fuels China’s massive steel industry.

Spot Iron ore prices Q1 2021

China is confused, one day it wants to cut steel production but control prices, then reduce investment but maintain employment.  The chaotic announcements are largely the response of a bully not getting its way and not knowing how to deal with it. That scares markets.

Bottom line is China revived its economy after the pandemic by turning to fiscal stimulus and monetary easing by producing enormous amounts of steel to feed its manufactured property and infrastructure boom. This sent iron ore and steel rebar prices soaring, over double over the past year.

Beijing’s attempt to chart a course to the carbon neutral economy promised by President Xi Jinping last year is another spanner in the works, but clearly that was nothing but talk and misdirection.  Such a policy would involve producing a lot less of the alloy, which contributes 17 per cent of national carbon emissions, according to Goldman Sachs. Bets, recommended by Banks like Goldman have fueled many of the price swings on how this contrary polices could play out for the iron ore and steel markets, which typically moves in lockstep with the Australian dollar.

Beijing blamed, at least publicly, speculators for driving prices higher. One irony of that policy is the important role speculators play in actually reducing volatility by boosting liquidity in futures markets, according to a recent note from Goldman. Put simply, more buyers and sellers mean that price adjustments become less abrupt.

via TC

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