Posted on 10 June 2020

 

Source: Argus to www.argusmedia.com

Chinese steel demand is on course to outperform last year's levels from mid-June to mid-July, as a result of firm iron ore prices and extended strong demand after Covid-19-related restrictions were lifted earlier in the year.

But high output levels and import volumes, along with soaring raw materials prices, are key risks to the outlook, market participants said.

Downstream demand is typically strong from around March to April but weakens in the mid-June to mid-July period because of the onset of the rainy season in south and east China and high temperatures in the north.

Hot-rolled coil prices in Shanghai soared by 450 yuan/t ($63.60/t) from early April to Yn3,650/t on 8 June, while rebar prices in Shanghai increased by Yn220/t to Yn3,620/t during the same period, according to Argus data.

Demand support

Rebar demand is likely to be supported by an increase in new project starts in China's real estate sector from the second quarter onwards. Real estate was the last of the sectors that contribute to China's steel demand to resume operations after the Covid-19-related lockdowns.

"Rebar demand in north China will remain strong in the summer season, especially in Hebei. Demand for construction steel from the Xiongan New Area will support rebar consumption in north China this year," a north China trader said, referring to the planned mega-city of Xiongan near Beijing.

The decent profit margins have stimulated Chinese mills to run at nearly full capacity during the past two months, pushing up output sharply, a Shanghai-based trader said.

Rebar margins are around Yn100-200/t and HRC margins are at Yn100/t, market participants estimate.

"Output will stay at a high level from mid-June to mid/end-July, yet steel profit margins are likely to narrow on higher costs of raw materials," the trader added.

China iron ore and steel association (Cisa) members produced an average of 2.0925mn t/d of crude steel over 21-31 May, up by 0.6pc from 11-20 May and higher by 4.4pc from a year earlier, Cisa said.

This was the second-highest level on record behind 2.1049mn t/d in mid-September 2019. Cisa data includes more than 100 of the country's largest steelmakers. Mills have also reduced steel inventories, which soared to record levels during February-March lockdowns.

Robust raw material prices, especially for iron ore, are also expected to support downstream prices.

"Vale's iron ore production will remain the biggest uncertainty due to the Covid-19 spread in Brazil, while domestic Chinese demand is not expected to decline given Yn100-200/t profits for blast furnace rebar producers," an eastern China trader said.

"Iron ore prices will stay at a high level unless China's steel mills cut production significantly due to losses," he added.

There is also optimism about demand based on government stimulus measures.

"China will increase its infrastructure construction in the second quarter and will continue to do so in the third quarter to offset the impact of the pandemic on the economy," another Chinese trader said.

The government announced plans for Yn1 trillion in bonds, along with Yn3.75 trillion in local government special bonds to fight the pandemic, at the National People's Congress in late May.

Risks

Robust domestic steel output and imports are factors that may weigh on Chinese steel prices in the coming weeks, market participants said.

"Chinese steel exports have basically stopped because of the higher domestic profit margins, while China has been importing steel since the second quarter. Steel imports may be around 5mn t for June-September arrival, and these will compete in the domestic market and weigh on prices from the third quarter onwards," a steel analyst in Beijing said.

China's steel imports were around 3.87mn t in June-September last year.

A northern China-based trader was also bearish on the outlook for the eastern Chinese market, citing high rebar output from local mills and a concentrated flow of imported steel into Jiangsu and Guangdong.

"The rainy season will also affect rebar demand in east and south China markets," the trader said.

An eastern China trader is keeping steel inventories low to manage risks given the uncertainty. Another trader said steel prices may fall in the coming months following their swift recent ascent. "But the fall would not be steep since raw materials are at a high level," he added.

"China's domestic demand is good, but with shrinking demand for exports, China's overall steel demand may decrease by 4pc from last year," a second Chinese analyst said. "Domestic steel output volumes would continue to hover at high levels."

 

 

 

Cisa mills' 10-day average steel output mn t/d

 

This news story is brought to you by Argus Ferrous Markets service

«  Back