Hottest commodity in China may start to cool before long

Bloomberg

These are great times for China’s gargantuan steel industry as product prices soar to multi-year highs, mills’ profits swell and speculators stake out record positions in futures markets in the country that makes half of global supply. They could be over soon.
While demand in Asia’s top economy has remained strong, “as the property market cools and investment growth slows, steel prices will start to fall,” Xu Ke, an analyst at Huatai Futures, said by phone from Shanghai. “We’ve seen many times in the past that when prices fall, they can fall very quickly.”
Reinforcement-bar futures retreated 2.9 percent to 3,551 yuan ($523) a metric ton on the Shanghai Futures Exchange. The drop took the most-active contract down from the highest close since 2013, when open interest was at a record, and pared a fifth weekly advance that’s the best run this year. Coil futures also fell.
China’s old-economy steel industry is booming even as the central government seeks to rein in its more unruly elements and combat overcapacity. State-ordered closures of induction-furnaces have spawned a shortage of reinforcement bar, a basic product used in construction. That’s hoisted prices and attracted speculative interest. Still, with slower growth seen this half, and other mills expected to boost output, the rally may be set to falter.

‘MORE BEARISH’
“There are fundamental factors underpinning the price surge,” said Xu, citing the tighter supply after the government efforts to cut steel capacity. He added: “I’m generally more bearish about the second half than most.”
There are plenty of warnings that China’s property market may cool, partly on government curbs designed to curb buyers’ enthusiasm and avoid a bubble.
Academia Capital, a commodities and emerging markets-focused hedge fund, said in June steel demand from real estate is likely to weaken over the second half, and even more in 2018, on the tightening measures and slowing sales.

PROFIT BONANZA
For now, mills are showcasing impressive second-quarter figures after profitability surged. Angang Steel Co., the listed unit of China’s fourth-biggest steelmaker by output, said it expects first-half net profit of 1.82 billion yuan compared with 300 million yuan a year ago. Hesteel Co., the listed unit of China’s No. 2 producer, said first-half profit could triple.