July 19, 2017 / 9:32 AM / 3 years ago

Over halfway into the year, steel outshines oil markets

SINGAPORE (Reuters) - Over halfway into 2017, China’s steel market has been the best performer among key Asian commodities because of cuts in low-grade steel production capacity that have reduced supply as demand has remained surprisingly strong.

FILE PHOTO: A sample bottle of crude oil is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

However, oil markets have been the worst performer despite a pledge by global producers to cut supply in order to prop up prices.

Since the start of the year, prices for Chinese steel rebar, used mainly in construction, have surged by almost a third this year to more than 3,800 yuan ($562.42) per tonne.

Meanwhile, Oman crude oil futures on the Dubai Mercantile Exchange (DME), an Asian benchmark, have are down more than 12 percent this year to around $47.50 per barrel.

“Energy markets are boring at the moment,” said one trader with a commodity merchant house in Singapore, adding that market attention was firmly on the steel complex.

This includes prices for iron ore, the raw material for making steel, which have recovered from a June slump by jumping more than 17 percent since the beginning of July to $65.74 per tonne.

“Steel output in China is running at record levels. Despite expectations of cooling demand in China, growth continues to surprise on the upside,” said Frederic Neumann, Managing Director of Global Research at HSBC in Hong Kong.

“The big drivers are housing and infrastructure construction... partly helped by Belt and Road Initiative investments in China’s Western and border provinces,” he said.

(For a graphic on 'Key Asian commodities performance in 2017' click reut.rs/2tEKHj0)

WILL THE STEEL BOOM LAST?

The same boom in China’s construction and infrastructure sector that supported steel also lifted copper prices, which have risen by a quarter since their 2017 low in May to almost $90 per tonne.

In a similar way, Asia’s benchmark coal prices have risen as China’s thermal power generation has increased over 7 percent so far this year, pushing Australian Newcastle export cargoes up by 25 percent since May to almost $90 a tonne after slumping earlier this year. nB9N1GH02K]

Still, oil and steel may swap positions going forward as crude supply tightens while China’s steel demand tapers off.

“Construction activity (in China), and thus rebar demand, could cool at the margin into year-end, partly reflecting regulatory tightening,” Neumann said.

At the same time, most oil analysts expect crude supply to tighten by the end of the year as the cuts by the Organization of the Petroleum Exporting Countries and other producers, including Russia, start to reduce global inventories. [O/R]

Reporting by Henning Gloystein; Editing by Christian Schmollinger

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