Chinese steel inventories are now falling quickly after hitting a multi-year high earlier this year.
The dramatic turnaround can be seen in the chart below from ANZ Bank, showing inventory levels this year compared to 2017 as well as the range over the past five years.
Having led to a sharp pullback in steel and bulk commodity prices earlier this year, fanned by fears that Chinese steel demand may be softer-than-expected during the Spring construction season, Daniel Hynes and Soni Kumari, Commodity Strategists at ANZ Bank, said the sharp reduction in inventories has helped to boost both sentiment and prices over the past month or so.
"Steel prices recovered strongly in April. Part of this has been a fall in inventories," the pair wrote in a note on May 10.
"Strong domestic demand reversed the build-up seen earlier this year. Total steel stockpiles hit a four-year high of 19 million tonnes in March but they have fallen 30% since.
"This should ease concerns that the seasonal restocking phase ahead of the peak demand period was going to be subdued."
And with steel prices recovering as inputs such as iron ore and coking coal decline, it's seen Chinese steel mill profit margins increase back towards the highs seen late last year.
Given the combination of falling inventories and high profit margins, it begs the question whether that could prompt steel mills to lift production, leading to increased demand for raw materials.
Hynes and Kumari suggest it might.
"We see iron ore prices finding a floor at current price levels and rebounding to $68/t in the second half of 2018," they say.
The price for benchmark 62% iron ore fines currently sits at $66.46/t, according to Metal Bulletin.
(Writing by Alex Guo Editing by Tammy Yang)
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