Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Something strange is happening in China's steel market.

Hot-rolled coil, a type of spooled sheet metal used to make everything from automobiles to trains and toasters, now costs less than the rebar used in reinforced concrete.

That's a rare event, and it's still rarer for the divergence to be this wide. Flat products like hot-rolled coil are generally more expensive to produce than those like rebar, and they sell for higher prices because they're bought by high-value-added consumer industries rather than the construction and infrastructure sectors.

Wheels of Steel
Chinese hot-rolled coil is rarely cheaper than rebar, and never by this amount
Source: Antaike, Gadfly calculations
Note: Shows spot price for hot-rolled coil sheet minus prices for 25mm rebar.

The 16 percent decline in hot-rolled coil prices over the past month, compared with a 7 percent decline in rebar, suggests that a reversal of that value proposition is underway. Instead of a robust private sector outspending the state, it looks like government cash is protecting the steel industry from a brutal slowdown in demand.

One explanation can be found in the country's car dealerships, where sales appear to have hit a sudden stop this year. Automobiles are one of the biggest consumers of hot-rolled coil, and inventories of unsold vehicles at the end of February were running at about double the level of monthly sales, the biggest such glut in three years, according to Bloomberg Intelligence data.

With China's government keen to keep the economy humming along ahead of the Communist Party's congress this year, the state sector is likely to be called upon again to help smooth out weak spots. Fixed-asset investments by state-owned enterprises surged during 2016 to counter a sharp slowdown in private spending, helping to keep GDP growth ticking over through the year. As Bloomberg Intelligence's Tom Orlik has argued, that's probably quite sustainable, at least in the short term.

National Interest
The Chinese state has led the growth in capital investment over the past year
Source: National Bureau of Statistics of China
Note: Based on cumulative figures.

Still, after a bumper first quarter that sent profits at Chinese steel mills to their highest levels in years in February, the surging price of coking coal is likely to push the industry into losses again this month, according to a Bloomberg profitability gauge.

Red Metal
Chinese blast furnaces are losing money again
Source: Bloomberg Intelligence

Strong factory prices in recent months are a welcome sign that the overcapacity that's plagued Chinese industry might finally be disappearing. The stimulus from Beijing, however, is evidence that the country's almost-forgotten ambition to rebalance away from investment and toward consumption is still a pipe dream.

Economists expect retail sales data due Monday to show a 9.7 percent pace of growth, the slowest reading since 2006. Grown-up economies need consumers to thrive. Rebar alone won't stop China's steel industry from crumbling.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net