Chinese steel prices ended Friday on another strong note despite having dipped slightly earlier in the week. New data showed house prices increasing in February but this still is not turning into strong steel demand and prices may not be sustained at current levels for long, Kallanish notes.

20mm HRB400 rebar in Shanghai was trading at around CNY 2,090-2,140/tonne ($322-329/t) on Friday, up CNY 45/t over the week. 5.5*1,500mm Q235B hot rolled coil meanwhile was trading flat at CNY 2,300-2,340/t.

The October rebar contract on the Shanghai Futures Exchange closed up another CNY 71/t at CNY 2,118/t ($326/t) on Friday, while the May HRC contract closed up CNY 90/t at CNY 2,322/t.

New data on house prices from the National Bureau of Statistics showed some positive figures for real estate but continued to confirm the diverging market that is holding back steel demand. House prices were up year-on-year in 32 of 70 cities, down in 37 and flat in one. While Shenzhen’s prices surged an incredible 56.9% y-o-y and Shanghai was up 20.6%, a large number of cities were still seeing y-o-y declines of -1% to -3%.

In order for China to deal with its excess housing inventories, prices in large areas of China may have to continue to shrink. But this only reduces the incentive for developers to build. Until destocking has some success and house prices across China increase enough for developers to be confident in their margins, construction demand is likely to continue to be weak.

Until then, steel production is growing and high domestic prices have stopped exports from taking away excess steel production. When the cycle starts to turn in the coming several weeks prices are likely to fall fast.