Chinese mills see higher gross profit in Nov; what to expect in Dec?

• Raw material prices rise m-o-m in Nov
  
  
• Demand still insufficient, supply weak
  
  
• But mills have room to improve profits in Dec
  
  

Morning Brief: With the upward movement in steel prices and production costs, the gross profit per tonne of Chinese steel enterprises in November showed a trend of rising first and then falling. But, gross profit of mills has improved. Overall, in November, products like wire rods, billets, HRB400 grade rebars and cold-rolled coils (CRCs) remained profitable, while the other items were still incurring losses. But, while there was a decrease in the profitability of CRCs, the profitability of other varieties improved by RMB 11-52 /tonne (t) ($1-7/t).

Data maintained with SteelMint shows that average prices of benchmark hot rolled coils in November 2023 rose 3.55% to RMB 4,052/tonne (t) ($564/t) against RMB 3,913/t ($545/t) in October. Benchmark rebars from Tangshan averaged RMB 3,850/t ($536/t) in November, up 4% m-o-m (RMB 3,689/t, or $514/t, in October).

As per sources, in November, the monthly average steel index price was at RMB 4,212/t ($587/t), an increase of 3.4% m-o-m. Specifically, the average cost of raw materials of spot, two-week, and four-week inventory increased by 0-2.4%, so the estimated gross profits of HRB400 rebar and HRC improved.

In general, in November, under the combined influence of multiple factors like production cuts, release of downstream demand, steady increase in raw material costs, and the obvious increase in the average price of steel, it is expected that the profit data released by the steel industry in November will be stronger than in October.

Raw material prices continued to rise in Nov

Driven by the rise in the average prices of iron ore and scrap, mills' costs continued to move upward. The pig iron cost index in November was at 134.3, up a marginal of 0.8% m-o-m.

Iron ore: The average price of Fe66% grade iron concentrate on dry basis in Tangshan was RMB 1,139/t ($159/t), an increase of RMB 50/t ($7/t) m-o-m, or up 4.6%. In terms of imported iron ore, the average market price of Fe61.5% iron ore fines from Australia at Rizhao Port was RMB 979/t ($136/t), an increase of RMB 49/t ($7/t) m-o-m, or 5.3%.

Coke: Since November, coke prices first declined before an upswing. The average price of grade II metallurgical coke in Tangshan in November was RMB 2,143/t ($298/t), a decrease of RMB 57/t ($8/t) or 2.6% m-o-m.

Scrap: Scrap prices showed an upward trend in November. The average price of HMS in Tangshan in November was RMB 2,640/t ($368/t), an increase of RMB 64/t ($9/t) or 2.5% m-o-m.

From the cost side, average prices of iron ore and scrap have moved up, and coking companies have started their third round of price increases. Thus, cost-side pressure continues.

Demand-supply dynamics in Nov

Demand still inadequate: The domestic economy is somewhat stable, but there are still many uncertainties. As a result, domestic demand is still insufficient, and the foundation for economic recovery still needs to be consolidated further.

Supply-side to remain weak: On the supply side, because of the combined impact of factors such as increased policy expectations, the flat control policies, rapid increase and then slowdown in demand, and the increased cost of raw materials, the willingness of domestic steel mills to unleash production will remain weak. Thus, it is expected that domestic steel production will continue to decline in November. The daily output of crude steel in the country will remain at about 2.5 million tonnes in November.

How will the near term unfold?

Steel companies' profits may still have room for improvement in December. Prospects of a recovery in the global economy still remain uncertain because of the sustained inflationary pressure and intensified geopolitical conflicts. The global manufacturing PMI has fallen back into contraction.

Moreover, in December, with deep winter approaching, which brings with it shrinking demand, the daily output of crude steel may continue to remain flat m-o-m.

Infrastructure investment is still expected to maintain a high growth rate under the steady growth policy, but real estate investment will still continue to grow negatively. Demand for construction steel is expected to remain weak. In addition, the decline in the manufacturing industry will put pressure on demand in the current month.

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