Chinese steel futures prices have roared to historical highs lately, propelled by bullish expectations for demand and by the likelihood of steel production restrictions remaining in place all year. The resultant rise in steel prices has bolstered the mills’ profits on making steel, but the market’s verdict on the sustainability of those robust profits remains mixed, Mysteel Global has learned.
The most-traded rebar contract on the Shanghai Futures Exchange (SHFE) for May delivery touched Yuan 5,017/tonne ($764.1/t) at one point on March 29, a new high since May 2011, before finally closing at Yuan 4,964/t when the daytime trading session ended on March 30. The most-traded hot-rolled coil contract, also for May delivery, closed at Yuan 5,372/t on March 30 after briefly touching Yuan 5,408/t the same day, the highest since 2014 when SHFE first launched HRC futures.
The unshakable optimism about the steel market held by the more bullish market participants has been affirmed by evidence of strengthening demand, Mysteel Global notes. For example, Mysteel’s survey among 237 steel traders across China found that the trading volume of construction steel over March 22-26 jumped by an impressive 19.3% on week to 246,267 tonnes/day on average.
On the other hand, the rise in steel prices also followed the imposition of curbs on steel production during the past month, and the confirmation that steelmakers in the production hub of Tangshan, North China, will be required to continue constraining production for the rest of this year.
“The period when the toughest restrictions were in force has passed, and steel production will rebound in the near term,” a Shanghai-based futures analyst said. “But the space for that rise in output is limited as the long-term curbs will still restrain production,” she warned.
The Tangshan government had released a notice on March 19, requesting that all but two of the 24 BF-steelmakers under the city’s jurisdiction curtail their production from March 20 to December 31 by 30% to 50% to help reduce air pollution, as reported.
The rapid increase in prices which followed this news saw the steel mills’ profit margins increase. According to Mysteel’s calculations, the complete cost of making billet in Tangshan averaged Yuan 3,745/t on March 26 while the Q235 150mm square billet price there was assessed at Yuan 4,710/t EXW and including the 13% VAT on the same day. This means the mills’ average margins had yawned wider to Yuan 965/t, as against the Yuan 151/t one month earlier.
In parallel, Mysteel’s survey among 10 sampled steelmakers in Tangshan showed that the actual gross profits of making billets averaged Yuan 699/t as of March 26, also higher than the Yuan 220/t one month before.
“The actual profits currently are not as handsome as in 2018 as raw materials prices now are much higher,” a market source based in Beijing explained. Yet he cautioned that the high finished steel prices – as well as the mills’ juicy profits – might not endure.
“There is still rising space for steel prices, but the room is limited – perhaps another Yuan 100-200/t at most for rebar,” he suggested. “Steel demand is firm, which will drive prices up, that’s true, but you have to think about whether steel end-users can accept such high prices. The rises in raw materials would be reflected in steel-intensive products sooner or later, and once these can no longer be borne by the users, the prices have to retreat,” he added.
He also pointed out that to some extent the high profits might be partially offset by raw materials prices. The rise in steel prices saw the most-traded iron ore futures contract on the Dalian Commodity Exchange for May also rebound from a comparatively low level, climbing by a total of Yuan 79.5/t from the settlement price on March 22 to close at Yuan 1,098.5/t on March 30, back to a level above the Yuan 1,000/t threshold.
However, the Shanghai source was more bullish, maintaining that the healthy margins on steel would remain for some time. “During the past two years, Beijing’s supply-side reforms stimulated the mills’ profits to rise, especially in 2018. We saw the steelmakers boost their steel production to maximize profits whilst the higher production also stepped-up raw materials prices,” he explained. “However, starting this year, things have changed.”
The Chinese government’s determination to curb steel production in 2021, coupled with its long-term target of reducing carbon emissions, might see China reach the peak of steel capacity utilization, he stated.
Written by Anna Wu, wub@mysteel.com
This article has been published under an article exchange agreement between Mysteel Global and SteelMint.
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