Steel prices in China are likely to stay at high levels in May but this may also lead buyers to slow down purchases with a possible turning point in June.

Many market participants were bullish on steel prices for the second quarter as demand ramps up with higher downstream operating rates. Supplies were also constrained due to extended winter production cuts as well as environmental inspections.

With positive fundamentals, steel prices surged on the tear since the second quarter kicked off. Rebar prices climbed 450 yuan/mt to 4,122.6 yuan/mt as of Thursday May 3.

However, such high prices are likely to hold back market participants. Trading liquidity has become thin over the past few days following weeks of steel price gains. Some traders said that they plan no additional procurement other than purchasing on demand.  

Fundamentally, we see a few factors at play.

The government of Jiangsu imposed severe environmental inspection across the province in April, which led to broad-based production suspensions in Xuzhou, Lianyungang and Changzhou. As the weather turns better, the supervisions are set to relax. Most steel mills have also resumed their production now. We expect the rising steel supplies in May to eke out the supply gap in April. This is likely to narrow the upward room for steel prices in May.

But a noteworthy development is a new round of environmental inspections that will start in Hunan and Hebei provinces.

Demand, on the other hand, is bolstered as the examination and approval process of public-private partnership (PPP) infrastructure projects was shortened and operations picked up. A total of 123 such projects were kicked off in March, bringing the number for the first quarter to 216. Overall projects that have begun as of the end of March amounted to 1,375 with operating rate at 41.4%.

Additionally, steel exports are likely to gain some support on a longer term basis if the U.S. tariffs on steel and aluminium imports from China can be exempted following the U.S.-China trade negotiations.

Trade tension between China and the U.S. has simmered since March as the two biggest economies threatened to impose sweeping tariffs on a wide range of imports from each other. However, the steel market did not see bouts of volatility by the trade conflict. This reflected the market’s high anticipation of trade reconciliation.

• [Editor:Wang Linyan]