[ferro-alloys.com]Steel demand from China's construction sector may have peaked in May as seasonal rains bear down on the country's east and south in June and as high steel inventories are expected to weigh on prices over the second half of the year, market sources said June 2.

However, these factors could also be offset by stronger trader and mill cash positions and rising raw material costs that should lend support to steel prices in June, traders said.

Some market sources said May would prove to have been the strongest month of the year for China's construction steel consumption after sites ramped up activities from mid-April to made up for the time lost to coronavirus lockdowns in February and March.

"Some construction sites are running almost 24 hours," one source said, adding that a big portion of February-March construction work had been compressed into April-May.

However, that construction rush will be mostly over by June, the source said, after which high steel production and inventories could pose a challenge.

China's steel output largely outpaced demand over January-April, but prices did not collapse because easing financial liquidity since February enabled mills and traders to hold onto stocks and wait for demand to recover - which did in April - rather than sell cheaply.

But the steel surplus that has been apparent since February may have been pushed down the road - and is likely to increase further in the second half of 2020, market sources said.

Traders said demand for construction steel has already shown signs of weakening in south China since late May due to heavy rain that is also forecast in east China in June. Northern China is less affected by wet weather and construction steel demand there is currently robust, but planned infrastructure projects are still underfunded, one source said.

Production of long steel products will also be incentivized by high steel mill margins, which stood at $81.10/mt for domestic rebar on June 1, S&P Global Platts data showed.

China's daily crude steel production was seen higher in May than a year earlier and was expected to rise further in June, market sources said. The profit margin for long steel has been better than for flat steel, indicating the domestic long steel market was likely to face greater supply pressure in June, the sources said.

China's Premier Li Keqiang at the recent National People's Congress said there may not be any further stimulus for infrastructure in H2, but market sources said if the current funding was used efficiently, infrastructure investment may still grow around 7%-10% in 2020, outpacing 3.8% growth in 2019.

(S&P Global Platts)

• [Editor:王可]