China: Iron ore, coke prices keep mills under pressure in Mar; Apr to be volatile

Morning Brief: In March 2022, the supply disruptions caused by the Russia-Ukraine war dragged up energy and bulk commodity prices globally. This, in turn, also pushed up Chinese domestic iron ore and coke prices.

With the peak winter season over, steel mills have gradually resumed production, a factor driving up raw material prices and increasing the cost of production for mills.

Inventory cycles influence costs

However, the cost incurred is varying for mills, according to their differing raw material inventory cycles. The shorter the inventory cycle, the more obvious is the cost pressure during a period of raw material price increase.

For instance, on a monthly basis, in March, the average spot cost index was RMB 169.7/t, an increase of 10.4% compared to February. The two-week raw material inventory cost index was RMB 159.1/t, a slight increase of 0.1% compared to February while the four-week raw material inventory cost index was RMB 153.7/t, down 2% from February. In the same period, comprehensive steel price index has risen, with a monthly average value of RMB 5,292/t, an increase of 1.6% from the previous month. In March, due to the different raw material inventory cycles, the cost varied and helped steel companies to get profit margins. Significantly, the longer the raw material inventory cycle, the better the profitability of the mills.

HRC reaps highest profit margin, rebar lowest

However, the sharp volatility in iron ore and coke prices in February and March had a great impact on the cost and profit of mills. Taking the grade III rebar as example, the gross profit in March was RMB 282/t less compared to February based on the cost of raw materials. The gross profit margin in March increased by RMB 68/t compared with February Thus, raw material procurement and inventory operation strategies are crucial to the profitability of steel mills.

The average monthly gross profit growth was the highest in hot-rolled coils, at RMB 195/t with the lowest seen in grade III rebar, at RMB 68/t. In other items, it ranged from RMB 74-187/t.

Iron ore, coke prices inflate production costs

Since March, with the end of the winter heating season and easing of lockdown measures in Tangshan, production has increased, driving up demand for raw materials. On 12 April, the price of Fe66% dry iron ore concentrate imported from Australia in Tangshan rose by RMB 205/t or 19.7% from February-end to RMB 1,245/t. The price of Fe61.5% fines at Rizhao Port was RMB 975/t, an increase of RMB 95/t or 10.8% since February-end.

Since March, coke prices have completed 2-5 rounds of increases, with a cumulative increase of RMB 800/t. On 12 April, the price of secondary met coke in Tangshan area reached RMB 3,650/t, an increase of RMB 800/t or 28% from February-end.

Thanks to the rising prices of iron ore and coke, the cost pressure on mills increased significantly.

As a result, the cost of manufacturing carbon billets, excluding tax, basis 12 April prices, increased by RMB 489/t compared with end-February, an increase of 13.5%. Compared to 12 March, this is an increase of RMB 193/t or 4.9%.

Outlook

Profits may be difficult to recover in April as the domestic steel market in this month will be more volatile. Factors like the uncertainty over the Russia-Ukraine war, withdrawal of monetary easing policies in some countries under the pressure of inflation will make international commodity markets more volatile.

China's monetary policy has been flexible and moderate, focusing on stabilizing the macro-economic market. However, the epidemic will hinder stable growth in the short term.

On the supply side, the high cost of raw materials is still curbing production capacity of some electric furnace companies, but still, production is resuming in some.

Demand for steel in real estate is still under pressure. The frequent epidemic surges and stricter closures have affected demand. Procurement for construction projects has been deferred, while demand for steel used in the manufacturing industry is also under pressure.

The effects of Covid control measures are expected to manifest late April.

Infrastructure will gradually pick up, which will drive demand for construction steel.

On the cost side, it is expected fluctuate in April. Iron ore and coke prices are still showing an upward trend. Under such circumstances it is difficult for steel enterprises to make profit.