A standstill in construction activities following heavy rain and massive floods in China recently dampened local steel demand in certain regions, but market watchers believe demand will benefit from water infrastructure projects worth 1.29 trillion Chinese yuan that the Chinese government recently committed to construct for long-term flood prevention.

A total of 27 provinces in China were affected by significant rain and flooding along the Yangtze River in June and July. In July, floods affected 38.2 million people and left 56 dead or missing, the Ministry of Emergency Management said in an Aug. 4 statement. Rainfall in the Yangtze River Basin in July reached its highest level since 1961 and the direct loss for the month was estimated at 109.74 billion yuan, according to the ministry. In the first half of the year, 119 people were reported dead or missing in the country and the direct economic loss was estimated at 39.31 billion yuan, according to a separate early July statement.

Keith Tan, senior managing editor of steel and raw materials at S&P Global Platts, said torrential rains, traditionally a seasonal dampener to China's summer steel demand, lasted much longer this year.

"This year's [rain] was especially long. [It lasted for] 50 days in eastern China, compared with an average of 24 days in previous years," Tan said, noting that the floods have not ended.

In reaction to the flooding, the rate of traders lifting cargoes of steel rebar from mills slowed in July compared with June, according to Tan. Steel rebar is commonly used in construction to reinforce concrete and other masonry structures.

Local analysts recently told S&P Global Market Intelligence that steel mills were facing difficulties in transporting products and raw materials as a result of the poor weather conditions, leading to a pile-up in steel inventories. According to data tracked by Beijing-based consultancy Lange Steel Information Research Center, steel inventories held by traders rose for six weeks in a row to the week ended July 31. The index compiled by Lange Steel for steel rebar inventories for the week ended July 31, increased by 7.6% month over month and 41.4% year over year.

According to a monthly report by Platts, steel mills were operating at above 90% of capacity in July as easier access to credit allowed mills and traders to keep larger inventories than normal without pressure to sell low to generate cash.

Despite the dampened steel demand, Chinese demand for the iron ore used in steelmaking remained robust, with steel production continuing to increase. Paul Bartholomew, the Asia-Pacific head of metals news and insight at Platts, said the floods have not led to any impact on China's iron ore demand and its June imports were the second-highest on record.

China imported 101.7 million tonnes of iron ore in June, according to official customs data, representing an increase of 35.3% year over year. Average daily crude steel production also hit a record of 3.05 Mt in June, Reuters reported July 16.

Bartholomew expects infrastructure sector stimulus by the Chinese government will result in increased steel demand in the second half. This sentiment was echoed by Wang Guoqing, research director of Lange Steel, who believes the reason that Chinese steelmakers maintained production is robust long-term demand for steel due to infrastructure investments in response to the coronavirus outbreak and the newly announced water infrastructure projects.

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In addition to “new infrastructure” projects such as light rail systems and intercity transit announced earlier in the year, the Chinese government said July 13 that it will spend 1.29 trillion yuan through 2022 on 150 water infrastructure projects to protect and repair the ecological system and for flood prevention, state-run Xinhua News reported. These projects are expected to leverage investment of about 6.6 trillion yuan, Su Wei, an official with the National Development and Reform Commission, said during a recent briefing held by the State Council.

Liu Xinwei, a steel analyst with Shandong-based consultancy Zhuochuang, said the costs of steel products usually account for 3% to 5% of the total investment of a water infrastructure project.

Liu said that steel products are used in the basic structures, the gates of dams and the inner walls of pipes in a water infrastructure project. The projects' construction will also potentially increase steel demand from the engineering machinery sector, the analyst added.

As of Aug. 6, US$1 was equivalent to 6.95 Chinese yuan.

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