The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.

China’s Baosteel has raised its domestic flat product distribution prices for August by RMB100/ton amid expectations for iron ore price increase and demand recovery from downstream industries. Profitability improvement is likely to be limited, however, due to the simultaneous rise in raw material prices.

Baosteel raises flat product prices by RMB100/ton on expectations for demand recovery from downstream industries

China’s Baosteel has hiked its domestic flat product distribution prices for August, pushing up the prices for HR, CR, and plate by RMB100/ton m-m. Of note, this marks the third consecutive month of Baosteel price increase for HR products. Serving as the primary driver of the August price increase is the longer-than-one month surge in iron ore prices witnessed from June due to Covid-19-triggered supply-demand instabilities.

However, in contrast to its comments last month expressing uncertainty towards demand recovery in downstream industries, this time, Baosteel also cited expectations for such demand recovery in 2H20 as a background factor in its decision to boost August ex-factory prices.

On Jul 14, the price of imported iron ore in China climbed to US$109.9/ton (Australian import, CFR, 61%), the highest level seen since Aug 1, 2019. We believe that: 1) the rapid spread of Covid-19 in Brazil; and 2) concerns towards seasonal production reductions at Australian mines in 3Q20 have been the main drivers pushing the price of iron ore to nearly US$110/ton.

Although China’s steel distribution inventory has increased for three consecutive weeks (from 14.23mn tons on Jun 18 to 15.06mn tons on Jul 9) due to off-season effects, domestic steel distribution prices have continued widening on expectations for demand recovery in 2H20.

China’s steel demand to improve in 2H20, but profitability to hinge upon iron ore price

As of Jul 14, China’s domestic HR price is up 15.3% versus the YTD low of RMB3,427/ton on Apr 8. Compared to the respective YTD lows, CR, plate, and rebar prices have risen 13.2%, 7.3%, and 6.6% as well. Meanwhile, as of Jul 8, China’s HR export price had upped 11.0% from US$400/ton on May 6 to US$444/ton. And, Korea’s domestic HR distribution price has rebounded slightly from W630,000/ton on Jun 8 to W640,000/ton on Jul 13.

We predict that demand for Chinese flat products will increase in 2H20 compared to the 1H20 levels, considering that: 1) the impacts of Covid-19 have faded considerably; 2) China’s government is extending its subsidies for the purchase of eco-friendly vehicles; and 3) demand for automotive steel plate is set to pick up on local government policies to provide additional subsidies for eco-friendly vehicle purchase.