Chinese steel prices which were on a roll over past few months have registered a fall this week. As SteelMint has reported, this week China’s domestic HRC prices fell by RMB 160/MT (USD 25/MT) whereas its export offers fell by USD 5-10/MT w-o-w basis.
The market participants were expecting a significant hike in China’s domestic and export steel prices post-lunar New Year holidays as the country’s steel demand from construction sector peaks from March till the start of monsoons. However, this price drop came as a surprise for all and has worried the industry about its future trend.
Let us have a look as to what led to the price plunge in the Chinese market:
The announcement of U.S. import tariffs
Last week on 9 Mar’18, the Trump government announced tariffs of 25% on steel imports from all the countries excepting Canada, Mexico, and Australia. This decision by U.S. was condemned by the majority of nations and although China’s percentage share in U.S.’s total steel imports is as low as 2%, the country’s steel prices plunged post announcement.
Subsequently, it can be concluded that this price fall in Chinese steel is highly driven by sentiments. Although China does not directly export steel to U.S. it exports the same to other countries such as South Korea, Vietnam, and Japan which are U.S.’s key steel importing countries. Now, the import restriction by U.S. will lead to the availability of surplus material in the market fearing which prices have dropped in China.
Demand-supply mismatch resulting in the supply glut
The Chinese government has been announcing steel capacity cuts since past two years. While in 2016 the country had production cuts of 65 MnT, in 2017 the country pre-achieved its production cuts target of 50 MnT by August.
With the onset of winters, the government announced additional production cuts for the winter season (involving the closure of polluting induction furnaces) starting from Nov’17 to Mar’18 in China’s five major steel producing regions and the production loss estimated during the period is 33 MnT. These production cuts, especially during winter season, led to increase in China’s steel prices over past few months.
However, with the winter production cuts coming to end in March, there was anticipation in the market that the government will extend the production cuts further amid government’s overcapacity control plans. Nonetheless, only one out five regions, Tangshan officially extended the capacity cuts till Nov’18 whereas another province, Heibi just planned to cut its steel capacity by more than 10 MnT for which official confirmation is awaited. Also for 2018, the country’s government had set a capacity cuts target of 30 MnT which is quite lower than previous years thus raising questions on the government’s intentions to control the requisite excess steel supply.
The trade analysts in China informed SteelMint that the mounting inventories rather than Trump tariffs is the major reason for the plunge in country’s steel prices. The country’s demand has not rebounded as much as the market was expecting as the government’s recent GDP and infrastructure investment fell this year against last year.
According to reports, in the end of Feb’18, the country’s inventory of five major steel products (HRC, HR Plate, CRC, Rebar and Wire rod) totaled to 19 MnT, up by 20% against Feb’17 and steep increase against 8 MnT in Dec’17. The large inventory in hand coupled with tepid demand means the retailers will be forced to sell their products at discounts.
Future price outlook: Wait and watch situation
According to traders in China, it is very difficult to predict the future trend of prices in the country as few believe that prices will rebound in near future once the peak season for constructions sector starts while few others are of the opinion that the prices in previous months were abnormally high and that oversupply problem has still not been solved given the fact that the production in the four major steel producing regions may resume after Mar’18.
SteelMint is of view that the steel prices in China are unlikely to increase significantly in the near future given the slack in demand and high inventory in hand. However, the price fall is probable in the long term amid excess availability of Chinese material in the market after the U.S. import tariffs.
Leave a Reply