- Covid surge, off-season dampen demand
- Raw materials price rise squeeze margins
- Prices likely to move in narrow range in Dec
Morning Brief: China’s steel prices continued to rebound in November. Rebar futures and spot prices have risen in varying degrees, while supply has also bounced back. Steel mills’ profits have also picked up, but output has not in a noticeable manner.
Why is production under pressure?
An analyst said that currently steel production is mainly constrained by weak demand, limited profit margins, and air pollution.
1. Covid resurgence: October saw a resurgence in Covid cases with daily infections exceeding 30,000. As of 24 November, 2022, there were 21,163 high-risk zones across the country, many of which have been closed. As a result, project construction has been significantly affected.
At the same time, due to the severity of the disease in Guangdong, Sichuan and other places, the scope of supplying steel products to the southern region has been limited. The Covid situation in Northwest China is also serious.
2. Weather dampens demand: In addition, as the temperature has dropped sharply, outdoor construction projects in the northern region have been stopped. Thus, lack of demand has gradually turned into the off-season.
In previous years, the southern region used to see peak of construction activity at this time of the year. But this year, thanks to the epidemic, site construction and material distribution have been greatly restrained, which will slow down construction.
3. Holidays start early: The Lunar New Year falls early this year. Due to the impact of Covid, some areas severely impacted have suspended work and begun holidays earlier. Therefore, workers have returned to their hometowns earlier than last year and this year’s off-season demand syndrome may kick in earlier and faster than in previous years.
With the rapid decline in demand and the lack of clarity on steel demand forecast for next year, it is becoming difficult for steel mills to increase production significantly.
4. Fighting air pollution: Due to the impact of air pollution, Hebei, Shandong, Shanxi, Henan, Sichuan and other places have recently initiated emergency actions in key industries to reduce emissions compulsorily, resulting in a large number of steel enterprises suspending or curtailing production.
According to data from the China Iron and Steel Industry Association (CISA), in mid-November, the key iron and steel enterprises produced a total of 20.0197 million tonnes (mnt) of crude steel, of which the daily output of crude steel was 2.002 mnt, a m-o-m increase of 0.76%. Based on this estimate, the national daily output of crude steel these 10 days was 2.7181 mnt, a dip of 0.02% m-o-m. At present, crude steel production has not yet seen a significant increase.
5. Raw material prices rise, squeeze mills’ margins: The cost of steelmaking is also accelerating amid rise in raw material prices. Last week, iron ore and scrap steel prices rose in varying degrees. Due to the rise in raw material prices, the production cost of steel mills has increased. Taking the prices of raw materials on 18 November as reference, the cost of producing common carbon billets has increased by RMB 39/t w-o-w.
In addition, after three rounds of hikes and lowering of coke prices in November, many coking companies have recently issued price increase letters. There were even reports that coke production enterprises in Shandong Weifang, Binzhou, Jining Tai’an and other places raised prices by RMB 100/t for wet quenching and by RMB 110/t for dry quenching.
As prices of raw materials and other inputs continue to rise, profits of steel mills will keep eroding, which is not conducive to the resumption of production.
Outlook
It is expected that the daily output of crude steel in November will still drop slightly compared to October but rebound in December.
From the perspective of steel price trends, there are not many changes in the fundamentals of supply and demand at present. But, with policies to stabilize growth initiated by the National Standing Committee, market confidence has been boosted. This has led to a rebound in the futures market, and therefore spot prices too have stabilised.
But, although steel prices will be supported by costs, the market will fluctuate in a limited range next month because of lack of demand brought on by the off-season.
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