March 23, 2018 / 9:02 AM / a month ago

China's steel traders fret price rout heralds prolonged downturn

* Rebar stockpiles highest since 2013; wire rod highest on record

* Big drop for prices further forward signals long-term gloom

* Orders books after Lunar New Year holiday slow to fill

By Muyu Xu and Josephine Mason

BEIJING, March 23 (Reuters) - China’s steel traders are worried the world’s top producer of the metal will suffer a prolonged downturn, as prices skid to their worst rout in years, construction-grade metal piles up and order books fail to be filled up as quickly as expected.

The most-active contract for rebar, standard grade steel used in construction, has plunged 15 percent this month - on track for its worst monthly performance since May 2016. The other most-active contracts - for delivery in October and January 2019 - have also each fallen around 15 percent this month, signalling growing long-term pessimism.

When China’s week-long Lunar New Year holiday ended last month, bullish traders had hoped for a revival in demand as building sites cranked into gear after the winter. Many also bet on higher prices due to lower supplies as Beijing extended production cuts as part of its anti-campaign.

But some are rethinking that strategy, nursing heavy losses without new orders from the building sector and swaying sentiment towards a lengthier drop, according to three traders and three analysts.

“We were too optimistic that the price rally would continue this year with ongoing environmental measures and capacity cutbacks,” said Wang Wei, a rebar trader based in Shenyang, Liaoning province.

Wang bought 15,000 tonnes of steel product worth 60 million yuan ($9.5 million) in January, a third more in volume terms than his usual orders. With rebar’s big drop, it’s lost 15 percent of its value.

DELAYED DEMAND

A prolonged downturn in demand could force mills to sell excess production abroad - sending shivers through the global market just as the United States slaps hefty import tariffs on the metal, increasing competition among global producers.

Downstream demand typically picks up about two weeks after the Chinese New Year break, which ended on Feb. 22 this year, but there is still little sign of restocking, an executive at a pipe mill and three traders said.

“March used to be a golden season for construction sites, but waning real demand has delayed it,” said Richard Lu, steel analyst at CRU.

The later-than-usual New Year break and the annual parliament session in March have contributed to the slow ramp-up and build-up in stockpiles, he said.

Rebar stockpiles SH-TOT-RBARINV have more than doubled since the start of February, hitting their highest since 2013 at 9.79 million tonnes as of Monday, data compiled by SteelHome consultancy showed.

Wire rod stockpiles SH-TOT-WIRDINV totaled 3.75 million tonnes, their highest on records going back to late 2011.

INFRASTRUCTURE SPENDING SLOWDOWN

The latest sell-off came even as some cities - like Tangshan, China’s top steelmaking city, Handan and Cangzhou - pledged to extend the winter heating output cuts once the heating season ended last week.

But the slowing pace of government spending on infrastructure this year and weakening property market have cast a pall over the market, removing a major boost to demand that has supported prices over the past few years.

Adding to the worries, mills that have complied with stricter government environmental standards are churning out more metal.

“Now the market is watching closely to see if inventories will be digested,” said Zhao Chaoyue, an analyst with Merchant Futures in Shenzhen.

CRU expects demand to drop this year due to the slowing property market and Beijing’s deeper deleveraging efforts and restructuring of its financial and industrial sectors.

If traders start fire sales of unwanted stock, it will add to the deepening pressure on prices - adding to the woes of market players like Shenyang rebar trader Wang.

“I’ve lost so much because I misjudged the supply and demand situation for this year,” he said. ($1 = 6.3306 Chinese yuan renminbi)

Reporting by Muyu Xu and Josephine Mason; additional reporting by Ruby Lian in SHANGHAI and Maytaal Angel in LONDON Editing by Kenneth Maxwell

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