China: Steel prices soar 50% y-o-y, but demand is down

On 22 Sept'21, the SHFE rebar futures Jan'21 contract closed as high as RMB 5,656/tonne (t) ($875/t) , a y-o-y increase of more than 50%. What changes have the current high steel prices brought to the market? How have downstream companies responded?

An official at a steel trading company in Taicang, Jiangsu, said that in the past, the daily shipment volume of finished steel here was more than 100 trucks. Today, that is dwindling by more than 30%.

The marketing director of a steel trading company in Taicang, Jiangsu said around this time in previous years the daily sales volume was 6,000-10,000 t, and at times even around 15,000t. But, from late June to till now (September), volumes have not touched such levels.

Increase in global demand at the beginning of the year led to a rapid rise in steel prices in China. Rebar prices were hiked by 30%, in May'21, reaching an all-time high of RMB 6,208/t ($961/t), while wire rods, hot coils also witnessed similar increases.

The price of one tonne of steel has risen from RMB 4,000/t ($619/t) to RMB 6,000/t ($929/t), increasing the monthly working capital by 50% for downstream users.

Industry insiders said many companies' orders had been signed before steel prices rose. If they have to buy at current steel prices, "their profits will be swallowed up". At present, most downstream companies have adopted a wait-and-watch policy, not daring to place new orders, buying only when required. As a result, demand for steel has fallen sharply in China.

In the first half of the year, the National Development and Reform Commission and the Ministry of Industry and Information Technology proposed to cut excess steel capacity to ensure that the country's crude steel output fell in 2021 y-o-y. But how are steel plants doing under the restrictions?

In an electric furnace unit in Xuzhou, Jiangsu, it was found that the steel furnace had been turned off. The staff said, till end of September, production will remain suspended for maintenance, and only 2,000 t of inventory are sold every day.

The sales manager of the unit said: 'The State requires that this year's total output be no higher than last year's. We produced about 70% of last year's output from Jan-Aug'21."

The staff said under normal circumstances, the monthly production capacity is more than 100,000 t. Due to the need to reduce production, the monthly output will be reduced to less than 50,000 t.

Domestic crude steel and finished steel output in July were at 86.79 mn t and 111 mn t, respectively, down 8.4% and 6.6% y-o-y.Iron ore prices fell by more than 40% in two months due to steel mills curbing production. At present, the profit of blast furnace steelmaking enterprises is more than RMB 800/t ($124/t), and the profit of electric furnace steelmaking enterprises is also more than RMB 500/t ($77/t). The future trend of steel prices still depends on the new orders signed by downstream companies and changes in demand.

Outlook

The overall supply of steel in the second half of the year should continue to decrease. Steel prices in the second half of the year are likely to see high volatility, based on the demand-supply pulls.