China's steel end-users prioritizing deliveries

China's major steel consuming sectors including construction contractors, auto and home appliances manufacturers have been prioritizing on fulfilling their signed contracts, though they have keenly felt the bite from the higher steel prices, and they may continue to endure the pain of higher costs now that prices of both steel longs and flats have spiked in the last few days, market sources shared on May 11.

Construction accounts for 60% of the country's total steel consumption, and auto and electronics and home appliances manufacturers are the core flat steel consumers, so recent price spikes especially so far in May have been seriously biting into the margins of these downstream industries.

Just in May, China's national HRB400E 20mm rebar price jumped Yuan 1,091/tonne ($170/t) to Yuan 6,346/tonne as of May 11, a record high since Mysteel started its assessment on March 3 2011, and the national price of Q235 4.75mm HRC soared Yuan 895/t to Yuan 6,643/t as of May 11, also a record high since Mysteel launched the assessment on July 22 2010. Both include the 13% VAT.

Added cost still bearable to property developers

To the property developers in China, especially those large-scale ones, higher steel prices have led to higher costs, but not too much to disrupt their procurement and construction paces yet.

"Steel procurement cost just take a small proportion compared with land lease costs, so there may be complaints, everything is as per normal," an official from a major steel trading company in Central China's Henan province shared. The company has been supplying steel to many construction projects.

He added, though, that substantial steel price rises, however, may have forced small-sized steel trading houses out of business.

"They have limited capital, what they have used to be sufficient for them buy and supply steel to a few property projects, but now they may need to have Yuan 50 million instead of Yuan 20 million to keep going, this is a serious financial pressure on them," he elaborated.

A Singapore-based property developer that has been sourcing steel from China for any years agreed on the pressure from the rising steel prices, but the impact is still manageable thanks to his long-time steel traders.

"We usually buy steel from traders instead of steel mills and the business relationship has run many years back, so our traders value our business relationship and will not greedily ask for steel price rises, they may even help us to absorb some in the days like this," he said.

Besides, "we usually book steel products one or two months in advance, so the May price spike has not bitten us yet, but I believe our traders will not spoil our business relationship just for the short-term gains, we have tided one another over through the good and bad days in the past many years after all," he added, disclosing that their steel traders usually hedging steel pricing risks via other means such as steel derivatives.

Unless really sizeable projects, the Chinese steel mills usually do not prefer to sell to individual construction contractors due to the rather complicated orders that usually involve many steel products but each at only a small volume, the Singapore contractor shared.

"For steel prices, there are ups and downs, and our traders will still value our business when prices are up, and we, when prices go down, will not bargain too hard either, so this is mutually beneficial in the long time," he added.

Automakers hedge against price risks via ferrous futures

To the Chinese automakers, rising steel prices is not happy news either, but long-term pricing scheme or investment in ferrous commodities for hedging, however, has cushioned the blow, enabling them to agree to higher steel prices without grudging much, according to market sources.

"What else can we do? We have to take it or leave it," an auto parts maker from East China's Jiangsu province said, with a bit of helplessness in his voice.

"Luckily, we have signed long-term supply deals via a sort of term pricing scheme, enabling us to avoid the huge cost increment in H1," he said, admitting that their usual annual pricing term has been broken because of the rather unique market situation, and they need to renegotiate the steel supply prices for H2.

"We have agreed to sit down with our suppliers regarding the prices, as we need large quantities (that can't be easily replaced), and steady steel supply is crucial to us," he added.

(A flat steel rolling mill in Ansteel, source: Mysteel?

"For those automakers that are investing in steel or iron ore futures, the reality is not as harsh, as we have lost some in the physical market, but we have gained some in raw materials futures hedging," a Shanghai-based source from an auto manufacturer admitted, adding that raising their car sales prices may not be an option, as car is already a rather expensive consumer goods against home appliances.

Besides, China's overall robust auto sales and rather modest steel prices gains in the first quarter also helped the domestic auto manufacturers to get through, Mysteel Global noted, as over January-April, China's auto sales surged by 51.8% on year to 8.75 million units.

The reason for the narrowing on-year growth of auto sales and output in April, CAAM said, was the gradual recovery in the automotive industry since April 2020, leading to weakening impact of low base numbers during last year's coronavirus onslaught.

Last month, the country's auto dealers sold 2.25 million units, higher than the country's vehicle output of 2.23 million. The numbers though, were lower by 10.8% and 9.3% on month respectively, according to the release.

SAIC Motor Corporation Limited, China's major auto producer, for example, posted a 500% on-year gain in net profit in Q1 to Yuan 6.8 billion, though it was still 17% than Q1 2019, according to its official release. The group sold 1.56 million units of vehicles over January-April, up 42.4% on year.

Home appliance makers transfer costs to prices

Electrical home appliances and electronics sales have been rather robust in China, enabling the domestic manufacturers to pass on some of the added production cost to the consumers, Mysteel Global noted.

Over January-April, China exported 1.2 billion units of electrical home appliances, up 45.9% on year, according to the latest data from China's General Administration of Customs.

"The sales of home appliances had been good over August 2020-Q1 2021, thanks to the rising orders from the overseas customers for white goods as people are staying home because of the COVID-19 lockdowns or curfews in many countries, and the loosening monetary policies have led to stronger consuming power," a Beijing-based home appliance analyst said.

"Starting last Q4, though, higher export volumes have not led to higher profits because of the rising raw material costs, but for some white goods such as refrigerator and air-conditioner, it is not only about steel, copper also contributed," she added.

Mymetal's 99.99% copper price in China reached Yuan 76,886/t including the 13% VAT as of May 10, the highest since May 21 2007, up Yuan 5,189/t from April 30, or a larger Yuan 11,721/t from end March. Mymetal is Mysteel's nonferrous metals intelligence arm.

A Shanghai-based citizen felt the price rises in the home appliance.

"(China's) Labour Day holiday (May 1-5) is usually a period for home appliances to launch promotions, but this year, they are getting expensive, I feel prices up 5%-15% from before the holiday," she said.

Sales price increments starting the first quarter, nevertheless, are insufficient to cover all the added costs, so some of the home appliance manufacturers are focusing on fulfilling the orders on hand while cautious in accepting new orders among the rather high steel and copper prices, according to the Beijing source.

It may still be early to detect any obvious impact on these steel-consuming sectors in China, as steel prices, after all, have only skyrocketed since May, and any impact may also be seriously moderated should such price surges are unable to sustain.

Written by Olivia Zhang, zhangwd@mysteel.com, Anna Wu, wub@mysteel.com and Hongmei Li, li.hongmei@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.