Unusual rally in seamless steel pipe prices, waiting for terminal demand recovery

After entering March, temperatures rose and construction sites gradually resumed work.Trading activity in the seamless steel pipe market picked up.Traders actively replenished inventories on bullish expectations for future prices, pushing overall stock levels slightly higher.

Looking at nationwide inventories, the comprehensive social inventory stood at 12.723 million tons last week, rising 50,000 tons or 0.39%.On the whole, national inventories edged up last week.

Current inventory volumes are 3.403 million tons lower than the same period last year, a sharp year-on-year drop of 21.1%.As the seamless steel pipe market enters the traditional consumption peak season, inventories are expected to start falling comprehensively this week.

Both market and steel mill inventories are far below last year’s levels.Low inventories create favorable conditions for seamless steel pipe price gains.

On March 5, the 2016 Report on the Work of the Government was released.The first two key tasks for 2016 are keeping economic performance within a reasonable range and deepening supply-side structural reform.These policies bring positive impacts on both supply and demand sides of the seamless steel pipe industry.

On the demand side:Stabilizing growth remains the core of macro policies, listed as the top priority among eight major tasks.The GDP growth target was set at 6.5%-7%, CPI growth around 3%, and broad money supply M2 growth at roughly 13%.

The fiscal deficit for the year is planned at 2.18 trillion yuan, an increase of 560 billion yuan year-on-year, lifting the deficit ratio to a record high of 3%.

The government plans to invest over 800 billion yuan in railways and 1.65 trillion yuan in highways.Twenty major water conservancy projects will be newly launched, and central budgetary investment will rise to 500 billion yuan.

On the supply side:The government will focus on cutting overcapacity in troubled sectors including the steel and seamless steel pipe industries.Authorities will rely on market forces, place enterprises as main players, encourage local governments to organize implementation, and offer central support.

Economic, legal, technological, environmental, quality and safety tools will be adopted to strictly curb new capacity, phase out backward capacity, and orderly withdraw excess capacity.Measures including mergers and reorganizations, debt restructuring and bankruptcy liquidation will be carried out to properly dispose of zombie enterprises.

Supportive fiscal and financial policies will be improved.The central government will allocate 100 billion yuan in special incentive funds, mainly for employee resettlement.

For the seamless steel pipe industry, the government work report fuels expectations of continuous demand improvement and shrinking supply.The overall supply-demand landscape is likely to improve in 2016, which will help boost market confidence.

In the market, a string of positive factors stimulated commodity prices during night trading on March 4, including upcoming Tangshan Horticultural Expo production curbs, increased leverage by Chinese authorities and a weaker US dollar.Ferrous metal futures such as rebar and iron ore hit daily limit-ups across the board.

Tangshan steel billet prices surged 240 yuan/ton from March 5 to 6, and climbed another 80 yuan/ton in early trading on March 7.Ex-factory prices of ordinary carbon square billets reached 2,100 yuan/ton, hitting the highest level since late March 2016.Market sentiment turned extremely optimistic.

Sharp rallies in futures and steel billets directly drove spot steel prices.Early on March 7, spot prices rose more than 200 yuan/ton in many regions, witnessing an unusual price surge.

It is worth noting that terminal demand has just started to recover and market inventories are still climbing.The steep short-term rally of seamless steel pipes was mainly driven by policy sentiment rather than solid real demand support.The sustainability of price gains hinges on the actual recovery of downstream demand.

In summary, policy expectations benefit both supply and demand for seamless steel pipes.Soaring futures and billet prices lifted market sentiment, making sharp short-term price increases inevitable.Nevertheless, the current rally is largely sentiment-driven without solid terminal demand backing.If downstream demand fails to pick up in a timely manner, seamless steel pipe prices will face substantial correction risks after the sharp surge.

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