China weekly: Production restrictions, volatile futures weigh on steel prices

Chinese steel prices witnessed a downward trend this week, except for coking coal which continued to gain on the back of supply constraints and good demand. While the ongoing production restrictions are impacting domestic raw material demand and prices, HRC prices are being impacted by weak buying interest due to volatility in the futures market.

1. China spot iron ore prices: Chinese spot iron ore fines Fe 62% prices opened at $119.75/t CNF China for the week and decreased to $106.75/t, CNF China towards the weekend.

China's demand for iron ore is expected to remain dull in the Sept-Dec'21 quarter amid restrictions on industrial activities that have been put in place ahead of the Winter Olympics as well as the cap on steel output.

China's iron ore imports are forecast at 342.67 mn t in Sept-Dec'21, as per China Iron and Steel Association data. This equates to monthly average iron ore imports of 85.67 mn t, much lower than the average monthly import volume of 97.5 mn t in CY'20.

Also, as per CISA, China is making all efforts to reduce reliance on imported resources. It will continue to develop its energy sector to support modernisation. Greater efforts will be put into developing domestic iron ore resources and raising production. Iron ore inventory at major Chinese ports increased to 142.3 mn t this week as against 140.2 mn t a week ago, as per data maintained by SteelHome.

a) Spot pellet premiums up w-o-w: Spot pellet premiums for Fe 65% grade pellets were assessed at $76.3/t, up $4.25/t w-o-w.
As per sources, reducing emissions in China will likely see a strong preference for high-grade iron ore and for products like iron ore lump and pellets. However, it was considered more cost-effective to use domestic pellets compared with imported.
Total pellet inventory at China's major ports was recorded at 4.3 mn t, stable w-o-w.

b) Spot lump premiums at $0.2200/dmtu: Spot lump premiums were recorded at $0.2200/dmtu, stable w-o-w. There were mixed opinions for lump premiums for the week. Some sources expected lump demand to increase in the upcoming months due to higher pellet prices and sintering restrictions. However, given the recent fall in coking coal prices and easing steel production curbs in Tangshan and Shanxi, lump demand was heard to be reducing now and weighing on premiums.

2. Coking coal offers up on the week: Australian premium low-volatile (PLV) hard coking coal (HCC) price moved up marginally this week. However, prices of the weaker grades such as PCI and semi-soft increased due to the supply tightness caused by the strong thermal coal market in China.

In the Chinese coking coal market, supply tightness and restocking demand continued to provide support to the rising CNF China prices. The latest price for the premium HCC grade is assessed at around $402.50/t FOB Australia as against 399/t FOB a week ago.

3. Shagang Steel trims scrap procurement price by $13/t: Shagang Jiangsu Steel has announced the fourth reduction in its scrap procurement prices during Oct'21 by RMB 80/t ($13/t) for all grades.

a) After the revision, the price of HMS (6-10 mm) stands at RMB 3,650/t ($571/t), including 13% VAT.
b) Chinese steel mills have sufficient scrap inventory and are not actively procuring scrap at present, SteelMint notes.

4. China's billet prices fall towards weekend: Steel billet prices in China's Tangshan witnessed a fall of RMB 90/t ($14/t), w-o-w. Domestic billet prices stood at RMB 4,900/t ($766/t) towards the weekend, inclusive of 13% VAT. According to data maintained with SteelMint, China's SHFE rebar futures contract for Jan'22 delivery closed on 29 Oct'21, at RMB 4,646/t ($726/t), witnessing a significant decline of RMB 254/t ($40/t), w-o-w.

5. HRC export offers dip $30/t w-o-w: Major Chinese mills are quoting HRCs for exports at $940-960/t FOB China, down $30/t compared to $970-990/t FOB in the previous week.

A wide gap between offers and bids resulted in a slow trade. Furthermore, Chinese prices still remain higher against other exporting nations such as India and Russia, thus, exports from China remained unattractive to overseas buyers.

Weak demand and drop in HRC futures led to a steep fall in domestic prices. Current week's prices stand at RMB 5,330-5,340/t (eastern China), down RMB 220-260/t as against RMB 5,550-5,600/t (eastern China) a week ago.

6. Domestic rebar prices drops RMB 90/t w-o-w: Domestic rebar prices moved down by RMB 90/t to RMB 5,150-5,180/t (northern China) compared to RMB 5,240-5,270/t (northern China) in the preceding week.

The demand for rebar picked up on improved weather conditions. However, prices remained under pressure as sellers started destocking activities fearing that prices might fall further.