Steel prices will continue to be under pressure as China continues to produce surplus and holds excess capacity. This has also resulted in steel futures falling to a record low on the Shanghai exchange.

According to Capital Economics, steel demand was almost flat in the first half of the year, with data for July showing a three per cent fall compared with the same period a year ago.

“This should be bad news for China’s steel industry, which was already suffering from overproduction and overcapacity,” it said.

Despite the gloomy outlook, Chinese mills continue to increase production since iron ore prices have dropped by 30 per cent to below $100 a tonne. In July alone, China’s output was higher by 11 per cent. On Tuesday, rebar steel futures on Shanghai Futures Exchange fell to a record low of $489 a tonne, though they recovered a tad towards the end.

Steel prices and iron ore prices have been mainly undone by the property sector in China showing no signs of revival. The construction sector, including infrastructure, accounts for over 50 per cent of the steel demand in China.

The weakness in the real estate sector is evident from the fact that prices for houses have dropped for the third consecutive month in China during July. The fall has come despite policies being eased for property purchases in some Chinese cities.

Analysts see steel bar prices dropping to levels of $475 before finding any support.

Given the fact that the US is showing signs of recovery and Chinese mills building inventories, iron ore may have bottomed out and could begin to stabilise.

The result of the fall in steel bar prices is that iron ore contracts have declined. Contracts that are to be delivered in January closed at $106.48 a tonne, after having slipped to below $106 at one point of time on Tuesday on the Shanghai Exchange.

The lower prices for iron ore have also led to some Chinese traders queuing up to build inventories. Spot prices are currently a little over $90 a tonne.

Reuters said that, according to Steel Index data, iron ore for immediate delivery to China is ruling at $93.90 a tonne.

With steel consumption growth likely to be negligible in China, prices will rise only if overproduction is curtailed, according to Capital Economics.

On the other hand, the positive for iron ore is that Chinese mills are cutting back on their inventories and any move to rebuild them will push up prices.

Last week, steel stocks in China fell to a 20-month-low of 12.7 million tonnes.

At this point of time, traders usually cut back on their inventories since demand slows in the construction sector. Lack of finance is also hurting and the Chinese probe into commodity financing is doing no favour.

But there is a ray of hope with the US importing more semi and long steel products.

Total supply of steel in the US increased over eight per cent in the first half of this year. This is despite imports of steel rebar declining 50 per cent in July after peaking in March. Imports of steel wire rods were also down.

Some of the Chinese traders are least perturbed by fall in iron prices and about seven lakh tonnes of ores are due to arrive by October. Quite a few of them are looking to average out their purchases by pegging their prices to higher levels that could prevail in September and October.

With the scrap market too being dull, it could take quite a while before steel and iron ore prices begin to look up.

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