China Steel Sector:Late-June CISA output rises
Nationwide, CISA estimates that China’s late-June steel output rose 2.8% to 831mtpa frommid-June levels, now 4.6% lower than its recent peak in late-May (871mtpa). For CISAmembers, output climbed 2.9% to 644mtpa from mid-June levels. With Tangshangovernment imposing emission control and the recent flooding of Central and SouthernChina, we believe early-July steel output will likely ease. With inventories low,construction lead indicators still firm and fiscal policy expected to remain supportive, wesee attractive sector risk-reward. Stay OW Angang and Magang, both recently announcedpositive profit alerts (Angang note, Magang note).
Late-June steel output up 2.9% vs mid-June, -2.3% y/y. According to China’s Iron &Steel Association (CISA), large and mid-sized mills (CISA’s 104 members) reporteddaily crude steel output of 1.76Mtpd or 644Mtpa in late-June (+2.9% from mid-Jun, -2.3% y/y). In addition, CISA estimates nationwide output rose to 2.28Mtpd or 831Mtpa(+2.8% vs mid-Jun, +1.4% y/y), 4.6% below late-May peak of 871Mtpa. This leaves non-CISA output at 0.51Mtpd or 187Mtpa (+2.5% vs mid-Jun, +16.6 % y/y). The associationalso revised the prior mid-June members output to 625Mtpa (+0.6% from original622Mtpa) and national output to 808Mtpa, +0.3% from the original 805Mtpa). Accordingto Mysteel’s survey, blast furnace utilization rates have dropped marginally last week to83.6% (85.3% the prior week), Meanwhile, the percentage of profitable mills improvedto 78.5% (68.7% the prior week), as steel prices edging higher.
Steel inventories down, iron ore port stocks climb further. Steel stockpiles withtraders fell 1.2% to 8.9Mt (9.0Mt mid-Jun), while at steel mills, stocks fell 9.9% to13.2Mt (14.7Mt mid-Jun). Taken together, we estimate steel inventories have dropped to11.2 days of use (12.8 days early-Jun, historically 14.2 days). On raw materials, iron orestocks at mills eased to 21 days of use (22.5 days early mid-June, historical average 26.0days), while stocks at Chinese ports climbed further by 3.0% to 104.5Mt or 33 days ofuse (from 101.5mt in mid-Jun, historically 30 days). With the recent strength of seaborneiron ore price, we estimate the discount for seaborne over domestic iron ore pricesnarrowed to 11% (15% in the prior week). Late-Jun utilization rates at independentdomestic iron ore mines increased to 43.7% (mid-Jun 41.8%) while in the broader survey(including captive and SOE mines), utilization rates eased to 63.2% (mid-Jun 64.3%).
Late-Jun coke plant utilization rates retreated to 78.8% (mid-Jun 79.7%).
Cash spreads expand, steel futures strengthen. HRC cash spreads improved 2.9% w/wto Rmb1,499/t (5 year average Rmb1,480/t, FY15 Rmb1,203/t) while rebar spreads alsoexpanded 3.8% w/w to Rmb1,436/t (5 year average Rmb1,422/t, FY15 Rmb1,273/t) assteel prices edging higher. Sentiment retreated moderately with market participantsexpecting spot prices to remain stable near term. Steel futures strengthened further w/w,HRC futures now up 25% and rebar up 30% from May lows.