China’s steel profit margins accelerate falls

19-November-2018

Chinese steel profit margins have fallen sharply over the past two weeks to put steel mills in a cautious stance but not enough to lead to iron ore cost cutting.

Steel mill’s gross profit margins have fallen by 200-400 yuan/t ($29-58/t) since 1 November to under Yn800-900/t for hot-rolled coil (HRC) and Yn800-1,000/t for rebar, according to a survey of mills late last week.

Steel prices resumed falls today as the demand outlooks remain bleak at the start of the winter season, when demand slows and this year’s looser winter output restrictions are adding to downwards pressure on prices.

“Steel traders are very cautious and do not want to stock up much with prices at high levels,” a Chinese mill official said.

Through last week Shanghai ex-warehouse prices for rebar fell by more than Yn150/t and for HRC fell by nearly Yn200/t since the start of the month. Shanghai trading firms cut offers further today with Shanghai HRC down a further Yn90/t to Yn3,820/t and rebar down by Yn110/t to Yn4,440/t. Traders said they want to grab margins while they are still there.

Tangshan billet prices fell by nearly Yn200/t to Yn3,800/t from 1-9 November before dropping by Yn140/t this weekend, then shaved that drop by rising by Yn20/t today to Yn3,680/t.

HRC markets are under some of the heaviest pressure from falling automotive sales. If HRC prices fall much further, it will be close to billet prices, and more mills with dual capacities will switch from HRC to rebar, a Tangshan mill official said.

Chinese mills also cut export offer prices today. Argus assessments for wire rod fell by $14/t to $545/t fob China, SS400 grade HRC fell by $6/t to $515/t fob China and rebar fell by $2/t to $533/t fob China.

“The steel market is clouded with heavy bearish sentiment, since steel prices are at high levels and demand will seasonally slow down,” a Hebei-based plate producer said.

Iron ore effect limited to premiums

Pinched margins have not led to widespread shifts in iron ore purchases. Mills continue to prioritise productivity to maximise output and profits, and so higher Fe iron ores remain in favour. If margins fell enough to make costs the priority, mills will shift to lower priced iron ores.

But higher grade ores have seen their premiums come under pressure, particularly for Brazilian fines IOCJ and BRBF, which tend to have lower impurities and higher iron content.

The 65pc index, which tracks high-grade IOCJ fines, has fallen from September premiums above 40pc to the Argus ICX 62pc index to a 24pc premium on 9 November, the lowest level since April. Tightened supplies of Australian 62pc fines has pushed the ICX index up above $70/dry metric tonne (dmt) to $77.80/dmt on 9 November, while the 65pc index has held around $95/dmt.

BRBF fines have lost much of the premium they gained in portside markets this year. BRBF 63pc basis portside prices have fallen to a 2pc premium over the Argus PCX 62pc index this month, down from a 5pc premium in October and 10-11pc premium during July-August. The BRBF portside differential fell from more than Yn60/wet metric tonne (wmt) fot Qingdao in August to Yn40/wmt in October to just Yn12/wmt last week.

But participants report no widespread shift in favoured purchasing. Different buyers are seeking most of the major iron ore brands and increasing lump ratios as is typical for the winter season.

Depressed premiums for the highest priced ores could be more a consequence of widening premiums for PF fines that have been in tighter supply and price closest to the ICX and PCX indexes.

But if steel margins narrow further, mills could cut costs by using more medium-grade and low-grade ores. Long-term contracts prevent quick adjustments to the iron ore burden so any changes will be gradual, a south China-based mill official said. “We will do some adjustment next year,” he said.Steel output is the other major factor driving iron ore demand, but it is unclear whether the trend will be supportive or negative to iron ore prices. The restrictions are more flexible this winter, so cuts could be less than last winter but still restrictive enough to reduce iron ore demand.

“My guess is iron ore demand will be weaker,” a Hebei mill official said. But the mill itself is seeking to increase production to offset the lower margins while winter output cuts are in effect. If that is the overall trend, then iron ore demand will be supported.

Mill margin survey last week:

• HRC profit margin at Yn700-800/t – Tangshan mill
• HRC margin at Yn700/t – Tangshan mill
• Rebar margin above Yn1,000/t with rebar priced at Yn4,640-4,650/t – Henan mill
• Billet margin at Yn600-700/t – Tangshan mill
• Rebar margin at Yn800-1,000/t – Tangshan mill
• HRC margin at Yn700/t – Tangshan mill
• Plate margin at Yn1,000/t – Hebei mill
• HRC margin at Yn800/t – Hebei mill
• Wire rod margin at Yn700-800/t – Tangshan mill
• H-beam and rebar margins at Yn900-1,000/t – Anhui mill
• HRC margin at Yn800/t, down from Yn1,200 prior to October – Anhui mill
• Rebar margin at Yn800-1,000/t – Guangxi mill
• Billet margin at Yn300-400/t – Tangshan mill

Source: ARGUS MEDIA