China weekly: Steel, raw materials prices show mixed trends on production cuts

Domestic steel prices in China rose w-o-w amid a hike in Shanghai Futures Exchange (SHFE) futures. Steel and raw materials futures have moved in different directions since participants are becoming increasingly focused on annual production cuts in China.

Total steel inventories at China Iron and Steel Association (CISA)-affiliated mills decreased by 229,900 tonnes (t) or 1.45% to 15.668 million tonnes (mnt) in mid-July 2023 compared with early-July 2023. Moreover, inventories declined by 553,600 t or 3.41% m-o-m as against mid-June. However, it was 2.594 mnt or 19.84% more than in the same period of last year.

The average daily crude steel output of CISA-affiliated mills stood at 2.248 mnt in mid-July, up 0.33% from early-July. However, output went down by 0.6% m-o-m against mid-June. Output rose by 10.3% y-o-y against same period last year.

Product-wise sentiments

1. China spot iron ore prices fall w-o-w: Chinese spot iron ore fines Fe 62% prices stood at $109.4/t CNF China on 28 July, 2023, which dropped by $5.95/t w-o-w, against $115.35/t CNF China in the previous week. Prices for iron ore dropped on weak demand expectations amid potential steel production restrictions. Mill margins will likely improve as finished steel prices rise and raw material costs fall. As a result, high-grade fines and some medium-grade fines with high content of iron will be in higher demand. Because mills are unlikely to pursue high amounts, prospective output limitations would encourage demand for low-grade fines.

According to SteelHome data, iron ore inventory at major Chinese ports decreased by 1 mnt to 121.8 mnt on 27 July compared to the previous week.

a) Spot pellet premium stable w-o-w: Spot pellet premium for Fe 65% grade pellets remained stable at $17.30/t on 27 July, compared to the previous week.

b) Spot lump premium stable w-o-w: Spot lump premium remained largely stable at $0.1395/dmtu on 28 July

2. Coking coal prices rise w-o-w: Coking coal prices were stable w-o-w to $237/t FOB on 28 July amid limited trading activity from China.

3. Chinese billet prices rise towards weekend: Billet prices in China's Tangshan witnessed an increase w-o-w by RMB 50/t ($7/t) to RMB 3,650/t ($511/t), including 13% VAT, on 28 July. Hike in rebar futures and finished steel prices have kept billet prices supported throughout the week. China's SHFE rebar futures closing stood at RMB 3,851/t ($539/t), a rise of RMB 28/t ($4/t), w-o-w on 28 July.

4. Domestic HRC prices rise: Domestic HRC prices rose by RMB 160/t ($22/t) w-o-w to RMB 4,010/t ($561/t) against RMB 3,850/t ($539/t) a week ago. Prices increased amid rise in SHFE HRC futures. The settled price of SHFE HRC futures (October contract) sharply rose by RMB 195/t ($27/t) w-o-w to RMB 4,093/t ($573/t) on 21 July as against RMB 3,898/t ($545/t) a week ago.

China's HRC export offers also increased by $30/t w-o-w to $585/t FOB Rizhao as against $555/t FOB last week. Export offers increased amid government's order to reduce production and not exceed last year's level. Moreover, strong demand from Vietnam for imported HRCs as two major Vietnamese mills have exhausted their allocations for September, resulted in increase in Chinese HRC export offers.

5. Rebar prices edge up: Chinese rebar prices edged up by RMB 20/t ($3/t) w-o-w to RMB 3,820/t ($528/t) on 28 July against RMB 3,800/t ($532/t) a week ago. SHFE rebar futures (October contract) settled at RMB 3,841/t ($525/t) on 28 July, up RMB 62/t ($5/t) against RMB 3,779/t ($522/t) a week ago. Also, the recent politburo meeting held on 24 July emphasised on improving steel demand to benefit the real estate market, consumption of automobiles, as well as infrastructure construction. This has lend support to the prices for both long and flat products.

Outlook: Currently, the market is concerned about the impact of decreased demand and production on the economy. However, the overall driving force for downward movement is not significant due to favourable inventory levels and stricter production controls. Additionally, supportive policy measures further limit the potential for price decreases. However, there may be negative implications for raw material prices, which can also restrict the upward movement of finished product prices.