Billet and slab will be in short supply in China this year owing to the Chinese government's environmental protection measures - mainly implemented on sintering and pelletizing equipment and blast furnaces, which are the main facilities producing semi-finished steel, an industry analyst in eastern China said.
For instance, in December, northern China’s steel hub, Tangshan, required some mills to cut production of their sintering and pelletizing equipment and blast furnaces to improve air quality, but did not require mills to reduce production on rolling lines.
“Production restrictions on sintering and pelletizing equipment as well as blast furnaces will be the first action local governments take to deal with air pollution because these facilities are the major contributors of dust and sulfur dioxide,” a second industry analyst in the eastern region said.
Meanwhile, the Chinese government pushes on with its efforts to make the country's steel industry leaner. For instance, the largest steelmaking province of Hebei was to cut 14 million tonnes of iron and steel capacity by the end of 2019.
The province was also asked to stop using blast furnaces of under 1,000 cubic meters and converters with volumes of less than 100 tonnes in the next few years, according to a notice released by Ministry of Ecology & Environment.
In contrast to the curtailed crude steel production, finished steel output is expected to stay high as a result of demand growth and mills’ healthy profits.
Therefore, China needs to import billet and slab. Market sources told Fastmarkets that some 600,000 tonnes of billet had been shipped to Jiangsu province over the past two months to be re-rolled into rebar.
“The demand for imported billet and slab will exist when the price gaps are reasonable,” a trader source in eastern China said.
But Fastmarkets research analyst Alona Yunda thinks that Chinese demand for semi-finished steel imports might not be as strong as many expect it to be.
“The fact that the pick-up in imports is mainly driven by competitive prices implies that China’s appetite for imported semi-finished steel may be a temporary phenomenon and is likely to cool down as their price competitiveness over iron ore fades,” Yunda said.
Price spreads for semi-finished steel over iron ore dropped significantly year-on-year in 2019, making semis an attractive option for some Chinese producers.
For instance, Fastmarkets’ iron ore 62% Fe fines index, cfr Qingdao averaged $69.70 per tonne in 2018, compared with the annual average of 3,677 yuan ($528) per tonne for Fastmarkets’ assessment for steel billet domestic, exw Tangshan, Northern China. The index averaged $93.63 per tonne in 2019, while the billet price averaged 3,469 yuan per tonne.
Imports of finished steel are being driven by higher domestic prices for such products in China than in other regions.
One major product, hot-rolled coil, has been imported in the past few months as a result of the price gaps.
Russian and Indian HRC were imported to China for various uses, sources said.
Early in November, Chinese buyers received overseas sellers’ offers at $415-440 per tonne cfr major ports. They thought $415-425 per tonne was workable.
Since China has sufficient HRC capacity, price is the main driver of imports of the product.
The first industry analyst in eastern China expects HRC prices to drop gradually on the prospect of increasing oversupply.
China produced 126.31 million tonnes of medium and thick wide strip (which includes HRC) in the first 10 months of 2019, up 10.1% year on year, according to the country's National Bureau of Statistics (NBS).
But downstream industries did not show similar growth. For instance, automobile production was 20.29 million units in the first three quarters of 2019, down 11.1% year on year, NBS said.
“Mills will keep production high to sustain their capital flows for loan repayments, especially for operators of HRC rolling lines added in the last five years,” the analyst said.
But automobile production is not expected to experience any significant growth over the next year.
“So, if overseas HRC prices rise slightly, China will close the import window,” an import trader in eastern China said.
Another important product, rebar, has had a steady growth in consumption rates in China because of the development of the country's housing market and infrastructure projects.
New construction starts totaled an area of 1.86 billion square meters in the first 10 months of 2019, up 10% year on year, the NBS said.
A few Chinese importers are looking out for favorable price gaps. But the standard of imported rebar does not match China’s, so such imports cannot be used in most projects.
If exporters are interested in the Chinese market, they need get the Chinese standard certification first, traders said. As with HRC, rebar output is likely to remain high in 2020, so there will be little need for imports, they added.
Hot metallic, scrap
Hot metallic products such as pig iron, direct-reduced iron (DRI) and hot-briquette iron (HBI) have been imported into China in the past couple of months because they are in short supply as a result of the restrictions imposed on blast furnaces as well as sintering and pelletizing equipment.
China produced 675.18 million tonnes of molten iron in the January-October period, up 5.4% year on year. Crude steel output totaled 829.22 million tonnes in the same period, up 7.4% year on year, according to the NBS.
As with semi-finished products, higher prices in China are driving import demand.
For instance, in early November, the price of imported pig iron was about 2,700-2,750 yuan per tonne fot at major Chinese ports, a trader in northern China said.
Prices for pig iron produced by Chinese mills were at 2,800-2,900 yuan per tonne in major coastal cities in early November, according to a local industry information provider.
China has imported pig iron, DRI and HBI from Brazil, Russia, India and Venezuela in the past two months.
Imports of steel scrap will be another area of concern in 2020, although most types of scrap imports have been restricted since July 1, 2019.
But with the development of electrical-arc furnaces (EAFs) in the country, demand for scrap is rising.
By June 2019, EAFs account for some 165 million tonnes of China's annual steelmaking capacity of about 900 million tonnes, according to a local industry information provider.
Steel scrap consumption was expected to reach 230 million tonnes in 2019, with domestic supply expected to make up 220 million tonnes of these, according to a local research institute.
“China is bringing forward EAF mills to replace BOF (basic oxygen furnace) mills because the former is more environmentally friendly. So demand for steel scrap will be on an upward trend in the coming year,” the second industry analyst said.
Scrap imports could gain traction if China lifts its restrictions on them, sources said.
But they will still face a number of limitations and challenges, according to Fastmarkets research.
First, profitability need not be discounted in the shift to EAFs.
On a global scale, an average BOF mill in the fourth quarter of 2018 had crude steel production costs that exceeded those at an average EAF mill for the first time since at least 2010, and this gap widened in the first two quarters of 2019, according to Fastmarkets' Steel Cost Service.
“This is an important sign that the shift toward EAF-based steelmaking is starting to make sense from a cost point of view,” Yunda said.
But the situation in China is the opposite.
Scrap prices in China had fallen below hot metal costs only after iron ore prices jumped above $100 per tonne cfr China. Prior to that, scrap prices were higher than the cost of producing hot metal for a year and a half. A recent downtrend in the iron ore and coking coal markets have resulted in heavy melting scrap in China being traded at a premium over and above hot metal costs again.
Other challenges to the BOF-to-EAF switch include the build-up of residuals in scrap over time that makes it less preferable for certain applications - as well as the fact that many BOFs in China are fairly new, which makes justifying investment into new EAFs more difficult.
The availability and cost of electricity also have to be considered.
And while BOFs - which consume some scrap in the steelmaking process - continue to dominate in China, there is a technical limit for these furnaces when it comes to the consumption of this steelmaking raw material.