Domestic steel prices in China have weakened slightly this week. The transaction of finished steel products at high level is weak, and the steel prices have fallen slightly, causing steel traders to panic. Affected by this, some steel scrap merchants choose to lower prices amid growing pessimistic mood although scrap purchase prices hit last 8 months’ high. With such backdrop, some merchants can’t help but ask, is this downturn a precursor to a big fall, or a temporary setback ?
After the recent price hikes, driving power for continuous increase seems weak in the short term – From 22nd Aug, Shagang Steel, the largest scrap consumer in China raised ordinary scrap prices by RMB 100/MT and the price of briquettes and raw material briquettes were raised by RMB 90/MT subject to the unloading date, and the oxygen cutting cost of pure rebar briquettes was adjusted.
This move triggered waves of price rising in the surrounding markets. The arriving quantity at mills of East China increased day by day, and some mills even saw lining trucks and the inventory was difficult to consume in the short term. This situation severely restricts the rising room of scrap in the later period. Coupled with gradually weakened billet price and transaction rate, steel scrap might face risk of setback in short term.
Although there is pressure to continue to rise, a sharp fall in steel scrap price is unlikely to happen. After all, there is no supporting ground for a big fall in steel scrap prices.
However, in the long run steel scrap still likely to fetch good demand –
1. Major steel mills in China continue to reap lucrative profits – Shagang Steel announced its semi-annual report on 7th Aug showed that the company’s operating income in H1’2018 was RMB 7.24 billion, an increase of 18.41% year-on-year; net profit was RMB 647 million, and earnings per share was RMB 0.29. As for Fangda Special Steel, the semi-annual report released on August 18 showed that the company’s operating income in the first half of the year was RMB 8.24 billion, up 31.36% year-on-year; net profit was RMB 1.31 billion, and earnings per share was RMB 0.29.
Although some steel mills have not announced the semi-annual report, a glimpse in the hole will help understand the whole picture that their operating income and net profit must also have increased substantially. The steel prices in the off-season of July-August are generally on the rise, therefore, the profits of steel mills in this period should be higher. Given that the profits are lucrative, demand for raw materials of steel mills will certainly not end. So in the long run, steel scrap still has promising prospects.
2. Environmental protection policy continue to release its power – On 26th Aug, the Ministry of Eco-environment issued a notice saying that in order to improve the environmental supervision effectiveness of key areas, identify and solve problems in short time , the Ministry launched the “Clairvoyance Plan” targeting “2+26” cities for Beijing, Tianjin and Hebei and its surrounding areas. (hereinafter referred to as “2+26” city) The entire administrative region is divided into grids of 3 km×3 km and by using satellite remote sensing technology, 3600 grids with higher average PM 2.5 concentration are selected as hotspot grids for special supervision. With the environmental protection being so severe, steel mills in order to increase revenue will inevitably increase the proportion of steel scrap, which will increase the demand for steel scrap in the later stage.
On the whole, the recent downfall of rebar futures has resulted in pessimistic market sentiments, and steel scrap prices in the short term may follow the decline trend of steel slightly; but in the medium and long term, a big decline lacks a solid basis, and the traditional peak season is coming, there are opportunities for steel scrap to go up again.
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