China’s RRR cut first time in 10 months supports steel futures, sources still skeptical over property growth

In order to keep the liquidity in the banking system adequate at a reasonable level, the People’s Bank of China (PBOC) conducted reverse repo operations in the amount of RMB 2 billion ($0.28 billion) through interest rate bidding on June 13, 2023, with the repo rate decreasing by 10 basis points to 1.9 percent from 2.0 percent. This was the first reverse repo rate (RRR) cut since August 2022.The Chinese currency hit a six-month low to 7.1680 per dollar after the rate decision while yields on China's benchmark 10-year government bonds fell to the lowest level over the past seven and a half month.   The rate cut on June 13 signaled Chinese policymakers are more and more worried about China’s economic development, according to traders and analysts in the financial market.   This move by PBOC has not been widely expected by market sources and it has led to a rise in steel and raw material futures prices. Rebar futures at the Shanghai Futures Exchange have added 1.88 percent today to RMB 3,741/mt after losing 1.08 percent yesterday. HRC futures have gained 1.77 percent over a day. Iron ore at Dalian Commodity Exchange have increased by 0.69 percent to RMB 801.5/mt.   However, skepticism over the strong support to the property market, which is the major driver of steel demand in China, has remained. Bloomberg reported today, citing sources familiar with the matter, that China is considering “at least a dozen stimulus measures including interest-rate reductions to support areas such as real estate and domestic demand”. But at the same time, a number of analysts expect them to be in place starting from October or later only. Also, according to Alvin Tan at RBC Capital Markets, cited by Asia Times, RRR cuts alone will not be able to solve the major problem now - a “troubled property sector”.   More rate cuts are expected by the Chinese authorities in the second half of the year, which will likely to have a smaller effect every next time. “The fiscal policy is not working very well, we are not very optimistic in term of raw materials demand [from steel mills in China] this year,” a Singapore-based trading source told SteelOrbis.   As for the steel prices in China, market sources still doubt any visible rises as they expect slowdown of demand due to the rainy hot weather in different parts of China, while steelmakers may inch up production, seeing improvement in margins, which will be negative for demand/supply balance again. Average spot rebar and HRC prices have settled at RMB 3,780/mt and RMB 3,885/mt ex-warehouse, up by RMB 27/mt ($4/mt) and down by RMB 15/mt ($2/mt) over the day, according to SteelOrbis data.