Prospects for China's Metallurgy

China's steelmakers face their biggest test in three years as gloomy outlook for demand drives prices down and lowers margins.

The world's largest steel market is cooling as the country's economy fluctuates amid internal pressures and the risk of a trade conflict with the United States increases.

Moreover, winter production restrictions to contain pollution may be less demanding than last year and less to support prices.

“Steel demand is currently facing serious headwinds and it is difficult to guarantee any positive catalyst next year,” said Helen Lau, an analyst at Argonaut Securities Asia in Hong Kong.

Baoshan Iron & Steel Co, a top steel maker, fell to its lowest level since mid-last year in Shanghai, while major producer Angang Steel Co reiterated its September lows.

The losses come amid declines in the broader market shaken by the trade war, with Baoshan's price-earnings ratio at an all-time low.

The bearish outlook was exacerbated on Friday after China's metal purchasing index fell in November to its lowest level since June 2016, when new orders collapsed.

Baoshan and Angang specialize in flat products, which are among the worst types of steel. Hot rolled coil used in consumer products fell to its lowest level since April and is down 11% this year.

Government intervention has saved China's steel sector from previous downturns. If the meeting between Presidents Donald Trump and Xi Jinping fails to ease their trade conflict, the Chinese government will have more incentive to take action.

Steel demand next year will "be highly dependent on the scale of the potential stimulus package, which we are generally constructive on given our confidence in Beijing's policies," Citigroup analyst including Tracy Liao wrote last week.