Risks Rise for Steel And Aluminum as Crunch Time Looms in China

  • Property market cooling is potential headwind for metals
  • Steel and aluminum prices have rallied in Shanghai this year

As its economy stabilizes, China just keeps on churning out more and more metal.

Rather than a return to the commodities super-cycle, gains in steel and aluminum production this year may be more akin to a high-wire act that is only delaying another crash in prices.

Steel output rose for at least a seventh consecutive month in September, pushing production over the year to date above 2015’s level for the first time, according to the statistics bureau on Wednesday. Aluminum smelters raised output to the highest in more than a year. Both sectors are responding to improved margins as prices are bolstered by a credit-and-infrastructure binge that’s helped China stay on track to meet its economic growth targets.

The risk for markets is what happens when demand recedes again, a prospect underscored by nascent weakness in the key property sector, as well as the potential for a policy shift to rein in financial risks in the biggest consumer. Chinese producers that account for half or more of world output of aluminum and steel may face renewed pressure after a turnaround in fortunes this year.

“The biggest headwind is the property market cooling down,” Helen Lau, an analyst at Argonaut Securities Asia Ltd., said by phone from Hong Kong. “China has already announced tightening measures for the property sector and we don’t yet know how that will affect investment. It doesn’t mean demand will disappear but it will get weaker and there is the risk of oversupply again.”

Underlying Factors

Even as China’s economy stabilized by growing at 6.7 percent in the third quarter, some underlying indicators flagged difficulties. Growth in new floor space under construction fell to 6.8 percent from a year earlier for the first nine months, versus a cumulative 12 percent expansion for the first eight months. Industrial output rose 6.1 percent on year, lower than a median forecast of 6.4 percent.

China has introduced curbs on the property market in 21 cities to pop a property bubble that pushed up the value of new home sales by 61 percent in September. That could feed into weaker demand in the coming year from a sector that accounts for a substantial part of consumption. “There is the danger that by the end of this year, we will have to see either a sharp fall in prices, or a sharp fall in production again,” Tomas Gutierrez, a Shanghai-based analyst at Kallanish Commodities Ltd., said by phone.

Steel Output

China’s steel output was 68.17 million metric tons in September, taking the nine-month total to 603.78 million tons, up 0.4 percent on year, according to the statistics bureau. Production of primary aluminum was 2.75 million tons, the highest since June 2015. Steel reinforcement bar on the Shanghai Futures Exchange is up about 36 percent this year, while aluminum is 16 percent higher.

China has long flagged its intention to shift the economy from investment-driven growth. Demand for nonferrous metals will grow through 2020 at less than half the pace in the first five years of this decade, the Ministry of Industry & Information Technology said on its website Wednesday. Metals consumption will grow at an average rate of 4.1 percent a year from 2016 to 2020, down from 10 percent in the prior five years as the country’s economy enters what the ministry calls the “new normal.”

— With assistance by Martin Ritchie

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