Steel prices continue to strengthen, a move, which continues to baffle market experts and has left many wondering when, not if, a correction will occur.
Steel prices have climbed in 2016, with gains accelerating in March as some positive sentiment surrounding the health of China’s economy boosted steel’s prospects, but now some of this bullish sentiment is waning, Economic Calendar.com reported.
Sure, China has turned out some positive economic data, but there has not been enough data, and the data received has not been strong enough to conclude that China’s economy is definitely on the path to recovery. This is what is needed for the steel market’s rally to be sustainable. Or, there is another option, China has to be found guilty of illegal trade practices.
The steel market has undergone a rapid shift in supply fundamentals as China flooded the market with cheap supplies. This forced out many other steel producers around the world. There are numerous trade complaints currently active against the country, and some findings could come out as early as this summer. If China is indeed found guilty, it could be very bullish for the steel sector.
But in the meantime, major headwinds remain for the commodity’s unexpected strength. A major bearish development for the steel market is the fact that steel inventories are rising in China. A rise in inventories can result in a longer-term correction in prices when China stops buying steel and instead opts to use stockpiled materials.
In order to use these stockpiles, infrastructure development is necessary, and although the Chinese government has hinted that this will be a part of its stimulus; there have been no tangible developments as of late.
China has always developed its infrastructure ahead of its need and given the recent slowing of the economy the country already has its infrastructure expanded well beyond it near-term need. It may be hard for the country to justify major infrastructure developments right now with vacant towns and empty roads a reminder of the country’s recent economic struggles.
