China's surprise interest rate cut could help ease the burden on hundreds of debt-ridden steel mills, but it is unlikely to spur a market recovery for firms facing a winter demand slowdown and a freeze on credit.
China's central bank said on Friday that it would cut rates for the first time in more than two years, stepping in to support an economy set to experience its slowest growth levels in nearly a quarter of a century.
The move had an immediate impact on prices, with Shanghai rebar futures up 0.9 per cent in morning trade from Friday's record low. Dalian iron ore also rose 0.9 per cent.
But analysts and traders said while there has been a psychological boost, the impact isn't likely to be felt until next year, especially if lending restrictions remain unchanged.
"The rate cut is not expected to have an immediate impact on the steel industry as demand slows down over the winter, and it will take time for construction projects to resume and drive up demand," said Du Hui, analyst with Qilu Securities in Shanghai.
Steel consumption is highly linked with the construction sector. Morgan Stanley said in a note on Monday that property sales had "yet to find a bottom amid continued tightness in credit growth".
Steel prices have slumped to decade-long lows this year. Global iron ore prices have also sunk 48 percent, with Chinese demand not rising quickly enough to accommodate a rapid increase in supply from giant miners like Rio Tinto .
Dozens of steel mills have been facing huge financial problems, as declining margins impede their ability to repay debts.
But it has been the credit crackdown that has drained the most life from the market, hurting not just producers but also traders, many of whom have been dependent on complex commodity financing arrangements. Analysts say the situation won't improve substantially until more access to finance is granted.
"Banks are still making risk control their priority and are curbing lending to steel companies," said Qiu Yuecheng, analyst with steel trading platform Xiben New Line E-Commerce.
"Just one move will not be enough to completely solve the problem of tight liquidity at the moment," he said.