China: A Rebound May Occur in Steel Scrap Market after Spring Festival

"As things stand in the current scrap market, it can be clearly felt that the winter storage market for scrap this year is not ideal." one industry sources said. However, from the analysis of the status quo of the industrial chain, there will be a wave of upswing in the scrap market after the Spring Festival, with an increase perhaps exceeding RMB 100.

Supply and demand contradictions are not prominent - According to reports, during the period from November to December 2018, due to the market downturn, and generally bearish outlook on the trend of 2019, steel mills were mainly working on inventory reduction, and the initial willingness of winter storage in the market is low. But as the market recovers, confidence of some mills have resumed slightly, though traders are more cautious in their operations.

Some analyst said that the current end demand in the South is still relatively strong and overall performance of steel demand is still better than expected thanks to successive release of winter storage policies by mills, which to some extent boosted the demand. Meanwhile, owing to low level operating rate of blast furnaces and EAFs, the cumulative inventory growth of steels still fell short of expectations.

Last week, the inventories of rebar increased by 9.4%, while mill inventories fell by 6.6%; HRC inventories increased by 3.8%, while mill inventories fell by 0.2%, showing less-than-expected inventory growth rate. Coiled rebar purchases in Shanghai market rebounded from 25,000 tons to 29,000 tons, indicating stronger performance than previous years. The "unattractive" winter storage policies issued by various steel mills also indirectly shows that inventory pressure of steel mills is not large.

In terms of steel supply, the national blast furnace operation rate is still low due to environmental concerns. Last week, the operating rate of blast furnace in Tangshan increased by 2.44% to 53.66% and the same of country-wide increased by 0.13% to 64.36%. The capacity utilization rate of blast furnaces national wide rose slightly from 80.66% last week to 80.8%. The gross profit of rebar rose from RMB831 to RMB920 / ton, which is 24.5%, while HRC gross profit rebounded to RMB700 / ton.

On the whole, the poor air quality in winter caused the blast furnace to run on low level, and the reduction of scrap usage led to a decline in crude steel supply; the demand side is still better than expected, and the rigid demand of winter storage still exists, thus the contradiction of supply and demand of steel is not striking, though it stands high possibility that steel price is subject to fluctuating rebound given the fact of low level of inventory and prominent basis.

High probability of rebound after the holiday - From the perspective of steel mill profits, according to feedback from some steel mills, the current short-route steelmaking is basically more of less at a loss, while profit margin of long-route steelmaking still ranges from RMB100 to 300/ton. Some analyst said that the marginal benefits of steel scrap fell to freezing point under the sluggish market environment. Meanwhile, differences in production processes, procurement costs and production limits of various steel mills formed the current market divergence.

According to institutional research, the current consumption cycle of steel scraps of most steel mills in China is concentrated in 7-20 days, with leading steel mills being at medium level, whereas some large enterprises are 30-40 days (routine stock level).

Considering that there is a gap period of about 15 days, or even longer in certain areas before and after Spring festival, the current inventory level for the steel mills is not high, and there is a clear upward trend after the holiday. From 2016 till now, scrap market consistently showed upswing as market opened after the holiday every year because of mills' efforts to take in more stock. However, although the market is projected to be bullish after the holiday, the traders are still recommended to stay cautious in an unclear trend of spot market. In short, the trend of steel scarp still hinges on the profitability of the steel mills.