Will Seamless Steel Pipes See a Fourth Major Price Surge?

Since last night, one piece of news has been widely shared in WeChat groups.It reviews the previous three major rallies in China’s seamless steel pipe market.Combined with the sharp price surge starting this March, many people wonder whether a fourth major rally will repeat.Notably, an eight-year cycle separated each of the previous three price surges, and exactly eight years have passed since the last rally.

Expectations of production cuts for the Tangshan International Horticultural Exposition, together with capital market sentiment, ignited the current upturn in seamless steel pipe prices.The market enjoyed a promising rally.Despite occasional minor pullbacks, bullish sentiment remained strong.Steel mills kept raising ex-factory prices and were firmly willing to prop up market prices, offering solid support to spot prices.Market confidence stayed optimistic.

However, capacity utilization rates and operating rates declined, and inventories at steel mills and in the society shrank.Downstream purchasing weakened, and most end users chose to wait and see.Can the rally sustain?Will prices keep surging and repeat the so-called eight-year cyclical boom?

Real estate is the largest downstream consumer of steel products.Property developers ramped up construction activity starting in the fourth quarter of 2016, and the momentum accelerated in the first half of this year.From January to February, the area of ongoing and newly-started residential buildings grew compared with 2015.Since 2016, the central government has rolled out a new set of destocking policies, lifting sentiment in the real estate sector.

Commercial housing sales picked up.Yet the housing upturn was mainly concentrated in first-tier cities, which boast relatively dense populations and steady housing demand.Third- and fourth-tier cities, alongside some second-tier cities, still face heavy destocking pressure.Although residential sales show signs of recovery, existing inventory and new supply will continue to weigh on the property market.The market is still dominated by inventory digestion, and demand from new construction projects cannot be overestimated.A slump in new housing starts would undoubtedly weigh on steel demand.

Data from the China Association of Automobile Manufacturers shows that China produced 2.521 million vehicles and sold 2.44 million units in March.Output rose 56.4% month-on-month and 10.3% year-on-year.Sales increased 54.3% month-on-month and 8.8% year-on-year.Both growth rates outperformed the same period last year by 6.6 and 5.5 percentage points respectively.

In the first quarter, vehicle output reached 6.59 million units and sales hit 6.527 million units.Output grew 6.2% year-on-year, and sales rose 6% year-on-year, also exceeding last year’s growth by 0.9 and 2.1 percentage points.Positive auto data lent some support to the current rally in seamless steel pipe prices.

For downstream industries consuming seamless steel pipes, growth is slowing or bottoming out amid gradual recovery due to macroeconomic adjustments.The global economy remains sluggish.Major export destinations see slow economic recovery, and trade barriers are emerging.Coupled with RMB appreciation and rising international steel prices, Chinese steel products are losing price competitiveness.Exports of seamless steel pipes will face headwinds.

Against domestic overcapacity, weaker export performance for some steel products will cap seamless pipe prices.

Steel is a key commodity.Market conditions directly affect steel demand, with impacts transmitted rapidly across the supply chain.

After the continuous rally starting in March, widespread bullish sentiment faded, and traders adopted more rational operations.Trading activity held steady in regional markets, yet most end purchasers stayed on the sidelines.While steel mills continued lifting ex-factory prices, market anxiety grew.Merchants remained cautious about restocking.The sharp rally faces mounting correction risks.

End-user demand fails to pick up effectively.A large volume of goods is currently held by intermediate traders.With widespread wait-and-see sentiment and slowing sales, and healthy profit margins enjoyed by steel mills, covert price cuts are inevitable.Market activity will cool down.If demand cannot improve, panic selling may emerge and trigger a price correction for seamless steel pipes.

The recent price surge boosted steel mill profits.Many small and medium-sized mills have resumed production, and major steelmakers have raised production targets.

If downstream demand fails to deliver strong improvement signals, continuous capacity expansion will unbalance supply and demand for seamless steel pipes.Will the current rally still have room to push prices higher?

China has rolled out supply-side structural reform, and provincial and local governments are actively responding to capacity reduction plans.Nevertheless, policy implementation takes time.Such reforms will improve the supply-demand balance over the long run, but investors should not expect immediate effects in the short term.For now, policies mainly serve as a short-term hype factor to stimulate market sentiment.

Judging from current price levels, there is still a large gap before matching the scale of the previous three major rallies.Taking all factors into consideration, we believe the possibility of a fourth historic major price surge for seamless steel pipes remains low.

Tags: Skyrocketing prices! How long can seamless steel pipe prices keep rising?