China weekly: Steel market shows varied response on production restrictions

China's steel market exhibited a mixed trend this week with an increase in prices of iron ore and finished steel products like rebar and hot-rolled coils, while those of billets, and coking coal remained under pressure.

The expectations around possible tightening of restrictions on blast furnaces and sintering operations in the near term have weighed on demand for iron ore and coking coal. However, the concerns around output rates amid such restrictions along with an increase in futures lent support to rising finished steel prices this week.

1. China spot iron ore prices rebound: Chinese spot iron ore fines Fe 62% prices opened at $99.95/t CNF China for the week and assessed at $98.50/t, CNF China towards the weekend. However, it was up compared to the previous week's $97/t CNF levels. With the Winter Olympics coming up in Feb'22, output curbs will possibly be implemented on both blast furnaces and iron ore sintering, which will keep production on the lower side. This, in turn, will weigh down demand for iron ore.

China data reveals that the steel output reduction target can be met as scheduled. Total reduction of crude steel production in Jan-Oct'21 reached 65.482 million tonnes (mn t). According to inferred data, crude steel output in November will be around 68.19 mn t and, therefore, in Jan-Nov'21, total output reduction will be 85.698 mn t. Hence, the task of reducing crude steel output in CY'21 by 26 mn t compared to CY'20 can be achieved if the December output is no more than 95.531 mn t.

Iron ore inventory at major Chinese ports increased to 155.4 mn t this week as against 150.9 mn t a week ago, as per data maintained by SteelHome.

a) Spot pellet premium up w-o-w: Spot pellet premium for Fe 65% grade pellets was assessed at $52.1/t, up against $48.75/t last week. It is unlikely according to few sources that mills would prefer pellets with the current low mill margins. Total pellet inventory at China's major ports was recorded at 4.3 mn t as against 4 mn t, a week ago.

b) Spot lump premium move up w-o-w: Spot lump premium was seen at $0.1335/dmtu as against $0.1245/dmtu a week ago. Some sources expected lump demand to increase given the cost-efficiency of lump as a direct feed compared to pellets. On the other hand, some sources expect lump premiums to face downward pressure given expected low steel output in the upcoming months due to production curbs for the Winter Olympics.

2. Coking coal prices : Seaborne coking coal (HCC) prices have declined by $46/t over the week amid slow trading activities as most end-users stayed on the sidelines, showing no urgency to transact in the short term due to the recent volatility.

Meanwhile, potential supply concerns prevail amongst market participants over predictions about heavy rainfall in Australia's key production hub of Queensland.

Latest prices for the premium HCC grade are assessed at around $317.50/t FOB Australia as against the previous week's $364/t FOB.

3. Domestic billet prices fall towards weekend: Steel billets prices in China's Tangshan witnessed a drop of RMB 30/t ($5/t), w-o-w. Domestic billet prices stood at RMB 4,290/t ($673/t), inclusive of 13% VAT. According to data maintained with SteelMint, the Chinese rebar futures contract for May'22 delivery settled at RMB 4,384/t ($688/t) on 3 Dec'21, a sharp rise of RMB 280/t ($44/t), w-o-w.

4. HRC export offers down $5/t: China's HRC export offers slid marginally by $5/t to $770-780/t FOB China as against $775-785/t FOB in the previous week. However, the increase in domestic market prices throughout the week led to a withdrawal of export offers by the mills.

In the domestic market, HRC prices increased by up to RMB 100/t ($14-16) to RMB 4,820-4,850/t ($756-761) (eastern China) compared with RMB 4,720-4,780/t ($740-750) (eastern China) a week ago.

5. Domestic rebar prices up RMB 30/t w-o-w: Rebar producers increased their offers by RMB 30/t ($16-28) to RMB 4,680-4,730/t ($734-742) (northern China) in comparison with RMB 4,650-4,700/t ($694-701) (northern China) in the previous week. The strengthening of futures prices alongside good end-user demand led to increased procurement rates from the stockists this week.