Improving steel margins fail to lift China's EAF capacity use

The capacity utilization rate among the 85 independent electric-arc-furnace (EAF) steelmakers across China under Mysteel's regular survey continued to trend downward over June 17-23, even though the business environment for the mills has improved markedly.

As of June 23, capacity utilization of these 85 sampled EAF makers had decreased for the seventh straight week by another 5.05 percentage points on week to 43.85%, or a new low since late February, Mysteel's data shows.

"Though domestic steel prices were still under downward pressure last week, the tumble in raw material prices including steel scrap has outpaced the decline in steel prices, as most steelmakers had managed to shift some of their cost burden to raw materials suppliers," a Shanghai-based market watcher observed.

For example, as of June 24, Mysteel's national price of the HRB400E 20mm dia rebar had decreased by Yuan 297/tonne ($44.3/t) on week to Yuan 4,286/t, while Mysteel's steel scrap price index had fallen by a larger Yuan 348.7/t on week to Yuan 3,351.4/t, both including the 13% VAT.

In tandem, the faster erosion of scrap prices enabled some 40 EAF steel mills sampled in another Mysteel survey to pare their losses on selling rebar to only an average of Yuan 6/t. In fact, the same survey found that some EAF mills in central and Southwest China were already enjoying positive margins of Yuan 30-120/t on their steel.

"Despite the shrinking losses or margin gains, some mini-mills still showed no interest in ramping up their production immediately, largely because in the steel market recently, there's a mismatch between finished steel supply and demand," she explained.

By last Thursday, inventories of the five major carbon steel products comprising rebar, wire rod, hot-rolled coil, cold-rolled coil and medium plate at 184 Chinese steel mills including both blast furnace and EAF makers under Mysteel's regular survey had edged up for the second week by another 5.3% on week to 6.76 million tonnes.

Nevertheless, despite some positive signs regarding profits, negative sentiment has prevailed in the domestic steel market this week as demand from end-users remains low, impacted by the high temperatures in northern areas and frequent heavy rains in southern China, Mysteel Global noted.

Besides the supply-demand imbalance in finished steel, limited steel scrap stocks held by some EAF steelmakers also prevented them from stepping up output, sources said.

"Though some scrap traders accelerated their pace of delivery to mills last week - in case scrap prices should soften further - the mills' scrap stocks were actually insufficient for their needs due to the seasonal supply tightness," she commented. The heavy rains and high temperatures throughout much of China at this time of year always hamper the collection and sorting of scrap.

By June 23, steel scrap stocks at the 61 Chinese steel mills Mysteel monitors hovered low at 2.28 million tonnes, and though this was higher by 3.8% on week, it was still 27.5% lower on year, according to Mysteel's assessment.

Written by Lindsey Liu, liulingxian@mysteel.com

Note: This article has been published in accordance with an article exchange agreement between Mysteel Global and SteelMint.