Will Recent Chinese Policies Hit The Steel Supercycle?

Indian steelmakers don’t expect recent policy measures by China to affect the commodity's supercycle—an extended period when the alloy is expected to trade above long-term price trends.

Brokerages downgraded the sector, terming the surge in steel prices as cyclical and not structural. Credit Suisse reduced its rating to ‘Underweight’, and JM Financial reinforced its ‘Underweight’ call after the commodity’s price fell recently.

The decline came after China—the world’s largest steel consumer—as part of measures to combat soaring commodity prices, summoned top executives and threatened them of severe punishment for violations ranging from excessive speculation to spreading fake news. The National Development and Reform Commission of China, according to a Bloomberg report, said it would show “zero tolerance” for monopoly behaviour and hoarding.

The world's second-largest economy also talked about curbing output and pollution, resulting in a dip in ferrous commodity prices in China and globally in May.

However, JSW Steel Ltd., which recently announced capex plans for the next five years, isn’t making much of China’s policy measures and is optimistic about demand.

Seshagiri Rao, the company’s joint managing director and group chief financial officer, told BloombergQuint in an interview that demand in China is “strong”, reflected in an increase in consumption notwithstanding the government’s directives.

China’s steel production rose 13.4% year-on-year to 97.9 million tonnes, according to data from the World Steel Association. For the quarter ended March, too, production increased nearly 16% over last year to 374.6 MT.

China's announcements are just to control speculation, which may lead to “some correction”, Rao said. The World Steel Association, he said, has guided for an incremental global demand of 102 million tonnes in 2022—of which 72 million tonnes will be from outside China.

Even other markets led by infrastructure expenditure and steel-intensive sectors are demanding a lot of steel, Rao said. He expects international demand for steel to be robust for the ongoing calendar and financial year.

Tata Steel Ltd.’s Managing Director TV Narendran called the steel cycle “structural” in nature and expects the next 10 years of the industry to be different than the preceding decade, given China’s rhetoric around curbing output and pollution and its high-cost structure as the nation continues to buy coal from sources other than Australia.

Demand is expected to stay strong, and supply was compromised in the international market, Narendran said in a post-earnings call in May.

Markets have been readjusting to the fact that China isn’t going to be an active player, while Japan and Korea might, he said. Those two countries are also going easy on exports amid the closure of blast furnace and reduction of carbon footprint in their respective nations, he said.

Implications For Indian Steel

With flip-flop policy measures coming from China, it seems like the world’s largest commodity producer is losing its grip on controlling the prices of steel, Goldman Sachs had said as early as December.

The speed of rebound in advanced economies, particularly the U.S., means China is no longer the marginal buyer dictating pricing, analysts led by Jeff Currie said in the note. The price dip after warnings from Beijing about speculation is a “clear buying opportunity”. There is mounting evidence that commodities are no longer China-centric, the analysts said.

The Goldman note came right after China Iron and Steel Association announced that Chinese steel prices were expected to stabilise as demand softens in the near term and a round of government inspections aim to stop commodity speculation and irregularities

Outlook

Indian steel manufacturers, including JSW Steel, Tata Steel, and Jindal Steel and Power Ltd. have termed the rise in commodity prices as a super cycle that’s structural and backed by demand—mostly infrastructure spends by the government. The consensus of analysts tracked by Bloomberg expects an upside of nearly 20-30% for JSPL and Tata Steel. Steel Authority of India Ltd. and JSW Steel have surpassed analyst price targets.