Chinese steel futures drop sharply; global trade impacted

Chinese steel futures on the Shanghai Futures Exchange (SHFE) have been fluctuating strongly, showing an overwhelming downtrend at close for the last couple of days. Yesterday, both the rebar and HRC indices were trading down 4-5% mid-day to close 3% down. Rebar futures Oct contract closed down 3% d-o-d at RMB 5,247/t, a drop of RMB 167/t ($27/t) compared to Monday's close of RMB 5,414/t. HRC futures also declined 3% by RMB 172/t ($28/t) to RMB 5,608/t against Monday's close of RMB 5,780/t.

On Monday, these had closed losing 6%.

Overall, the SHFE futures, in the last two working days from 30 Jul'21 have corrected 8-10% by around RMB 500 ($78/t).

However, in today's morning trading session, both HRC and rebar futures have rebounded.

Prices as on 9 IST, 04 Aug. d-o-d changes indicated against closing price of 03 Aug.

Why are futures fluctuating?

The key reason for the fluctuations is a crucial Chinese government meeting held on 30 Jul'21, whereby it decided to take corrective action on emission cuts which led to speculation of possible softening of steel output cut measures. Such a decision could change the entire dynamics of the strict production cuts planned out over the second half (H2) of the calendar. It may be recalled China has so far wanted to restrict its crude steel production to 2020's levels of around 1 billion tonnes.

"Now, however, the entire sentiment has changed. If the cuts are not so severe, crude steel supply will increase which, in turn, will exert pressure on prices," a source observed to SteelMint.

Spot prices slightly insulated

Even though the government's decision impacted futures strongly, the local Chinese spot market prices remained somewhat immune. They declined but not to the extent of the futures. For instance, billet prices in Tangshan fell by RMB 100/t ($15/t) on 2 Aug'21 to RMB 5,170/t ($ 800/t). But, overall, domestic trade remained weak.

Futures generally react faster than spot prices which take longer to get aligned to the former. However, importantly, the futures will impact the global trade more than local Chinese spot prices.

Effect on global trade

Several deals were reported to have been concluded in the last fortnight. But, with the futures down, many may become disputed since most were determined at higher prices. A scenario could evolve where many would-be buyers may want to back out. "If a situation arises where the futures drop further, there is a possibility that deals concluded last week may come under dispute," said the source.

Also, the global trade generally goes quiet when there is uncertainty over any policy implementation. Most buyers and traders recede to the sidelines waiting for stability to return to the market.

"Currently, there are no firm bids from China. Both suppliers and buyers are holding back their offers and bids. Chinese domestic billets prices corrected sharply by RMB 100/t on 02 Aug (around $15/t). No trade is happening," said another source.

India impact

The momentum that Indian mills had gained in the last fortnight may weaken. Indian mills too may move to the sidelines for the short term till the market finds direction.

Moreover, Covid resurgence in South East Asia, where Indian producers export in good volumes, has impacted domestic demand in these countries.

Thus, Indian exports will likely remain subdued for a short while. At least, till the Chinese market sees stability and domestic demand resurfaces in South East Asia.

An Indian state-owned steelmaker had floated an export tender for 60,000 t of steel blooms of size 150x150mm and 3sp/4sp grade for end-Sept shipment. According to sources, the tender fetched bids around $600/t FoB, however, it is less likely that the tender may get concluded due to bid-offer disparity.