[ferro-alloys.com]Rebar inventories have started to build in southern and eastern China as the rainy season slows construction activity, but steel prices are unlikely to fall sharply as the easing of domestic credit conditions mean mills and traders should not need to destock at low prices to raise cash, market sources said June 9-10.

Construction steel inventories in Guangzhou are currently around 30% higher than a year earlier, while rebar inventories in Hangzhou are 116% higher on year, according to local traders.

Hot-rolled coil inventories are also around 65% higher on year in Shanghai and double the usual level at Lecong market in Guangdong province, even though demand from manufacturing was less impacted by seasonal wet weather.

The National Bureau of Statistics' China manufacturing purchasing managers' index softened to 50.6 in May from 50.8 points in April, indicating the sector was still showing signs of weakness after lockdowns to contain the spread of the coronavirus in the first quarter.

However amid an easing of credit conditions in China in a bid to shore up business activity, some mills are understood to be offering financing support to smaller traders to help them through the slow season.

"In fact, mills will probably build up their inventories during the quieter period as, compared to traders, their stocks aren't too high and they are flush with cash at the moment," a market source in China said.

Major state-owned trading companies have also been financially helping mills that may be short of cash and, as a result, China's steel sector is not facing the cash flow challenges that steel producers in other regions are grappling with.

Domestic steel margins also remain healthy despite high seaborne iron ore prices. Domestic rebar margins in China stood at $73.53/mt on June 9, wider than $50.72/mt on the same day a year earlier, S&P Global Platts mill data showed.

The steel market is expecting a strong rebound in property sales and new starts in the second half of 2020 in tandem with looser monetary policies, and mills and traders are willing to build up inventories in anticipation of looming strong demand, some sources said.

Excavator sales jumped by 68% year on year to 31,700 units in May, according to NBS data. Excavator sales are an indicator of planned property and infrastructure construction activity, and the strong May figure suggests China's support for its infrastructure sector in recent months is starting to bear fruit, which should provide support to steel prices in coming months, market sources said.

(S&P Global Platts)

• [Editor:王可]