China’s steel outlooks dim as curbs take hold

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Iron ore prices fell by 13.5pc today as July-December steel production curbs underpinned a weaker demand outlook and surging metallurgical coal prices eroded margins.

The Argus ICX 62pc iron ore fines index fell by $20.65/dry metric tonne (dmt) to $131.80/dmt cfr Qingdao today — a record single-day decline.

Beijing has pushed steelmakers to reduce steel output so that 2021 is level with 2020. This will require aggressive cuts after output rose by 8pc in January-July to 649mn t. To shore up supply, policymakers have raised taxes on steel exports and directed state-owned mills to keep exports in line with 2020 levels.

"Medium term, China's demand for iron ore is expected to be lower than it is today as crude steel production plateaus and the scrap-to-steel ratio rises," UK-Australian mining firm BHP said on 17 August, ahead of a two-day 17.4pc slide in the ICX index.

Another factor has been surging met coal and coke prices competing with iron ore for margin room.

Highest-quality domestic coking coal grades in China have jumped above $500/t equivalent in spot trade. Low-sulphur Anze coal in Shanxi that is less tied to contract prices like Liulin coking coal rose by Yn200/t to Yn3,350/t ($515) today.

Beijing has approved mining expansions to plug supply gaps, but the additions will take time.

The Argus index for Chinese imports of premium low-volatile hard coking coal rose to a fresh record of $365.80/t cfr China today, driven by the informal ban on Australian imports and limited North American supply.

The Argus 62 CSR met coke index rose by $28.50/t to $508.50/t fob China this week. Met coke overtook iron ore as the biggest cost for steel rebar producers yesterday, with a 38pc share of costs, against 36pc for iron ore. The latter's share dropped to 31pc today, while met coke's rose to 41pc. Iron ore had accounted for up to 54pc of rebar costs in late June-early July, Argus calculates.

China's coking coal supply gap means there is no incentive to rollback its steel production cuts.

The largest mills reduced crude steel output by 4.4pc on the year to 2.04mn t/d in early August.

Mills' output curbs have focused on rebar because of its narrower margins. Shanghai rebar was selling at a loss earlier in the summer, before production cuts and iron ore price declines revived its margins, Argus calculates.

Blast furnace-based rebar producers reported profit margins of Yn400-500/t, while electric arc furnace (EAF) producers reported profits around Yn400/t earlier this week. EAF profits fell to Yn200-300/t today. Hot-rolled coil profits are higher, at around Yn800/t.

Argus calculates a profit of around $62/t for Shanghai rebar ex-warehouse at a sales price of Yn4,359/t ($672/t), excluding the 13pc value-added tax with costs for 1.6t of iron ore, 0.53t met coke and 0.15t ferrous scrap and Yn150/t for rolling and Yn100/t for alloy per tonne of rebar (see graph).

Mill maintenance outages are common in late summer, when construction activity slows, but it will be more difficult for mills to persist with cuts when peak demand emerges in September-October.

But mills will still face pressure to curb output during the expected rollout of China's decarbonisation plans in the autumn. These include finalising a roadmap for steelmakers, ahead of November's UN's Cop 26 climate summit in Glasgow.

North China mills will also need to reduce production in early 2022 to reduce pollution during the Beijing Winter Olympics on 4-20 February.


By Chris Newman

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