ASIA STEEL OUTLOOK: Spot prices may stay high but US trade defense weighs on sentiment
Prices for Asia-origin steel commodities could remain elevated for April- and May-shipment cargoes, although this will depend on further policy changes in China and the United States, market sources have told Metal Bulletin.
Bullish sentiment on near-term spot prices is prevalent because production cuts in China could yet be extended all the way into May-June.
“Many market participants think that prices will retain support for now, because production cuts could be extended to mid-May,” a key Japanese supplier of flat steel said.
Major commodities producer BHP said in a forecast that Chinese steel mills could reduce their utilization rates to an average of 80% no earlier than June because steelmakers will try to increase their output of construction materials to feed downstream demand.
However, this does not take into account the possibilities of further cuts all the way until the end of the year, with the key steel-making city of Tangshan said to be gathering feedback on the likely effects of production restrictions being in place until December.
The peak building and construction season in China is the second quarter of the year, and favorable domestic markets in South Korea and Japan are also expected to boost demand, with some sources expecting tight supply of flat steel in Asia due to there being fewer exports from these three major steel-producing areas.
In China’s rebar market, most participants are bullish on prices for the coming two or three months, due to production restrictions and demand from the construction sector to go into full swing. However, prices may remain at their current levels for the next few weeks before moving upward. This is because of the high level of inventories, which will take some time for the markets to digest.
The Metal Bulletin fob China Rebar Index was stable in the first two days after China returned from the lunar new year holiday, flat at $553.75 per tonne on February 22 and 23.
“The general price trend for rebar is expected to move upward in the next two or three months,” a trader in eastern China said.
Traders and end-users in Southeast Asia’s billet markets are generally bullish on prices due to tightening supply and depleting inventories, despite persistently stagnant demand in the local markets for finished long steel products.
Japanese mills last week withdrew their billet offers from the spot market and delayed the timing of sales because they believe that prices will increase, a major South Korean trader said.
“Some end-users in the Philippines are starting to increase their bids because they need material and also expect prices to go up,” the trader said.
In Indonesia, buyers were currently not interested in the high billet offers heard at $550-555 per tonne cfr last week. “But sooner or later, some will give in and accept those price levels,” an Indonesia-based trader said last Friday.
Flat steel buyers in Vietnam largely expect prices to continue on an upward trend due to the reduced volumes from key HRC suppliers in China, Japan and South Korea.
Traders expect spot negotiation values to increase further because of talks about extended production cuts in China as well as returning demand from downstream re-rollers and pipe-makers after the Tet holiday, which is Vietnam’s new year.
“Official production cuts may be extended to mid-May. Other parts of China, such as the key steelmaking city of Tangshan, may also impose their own restrictions on their steel mills until the end of the year,” a Chinese trader said.
The Metal Bulletin fob China HRC Index has seen small rises since China returned from the lunar new year holiday, up to $593.94 per tonne on February 23 from $592.83 per tonne on February 22, on account of such sentiments.
Section 232’s ripple effect on Asia steel
These bullish sentiments are being tempered, however, by the possibility of high import tariffs being imposed on Asia-origin steel by the US. These tariffs were among the recommendations made in the Section 232 report by the country’s Department of Commerce, after its probe into imports that may affect national security.
North-east Asia’s three largest steel producers will be affected by the US tariffs if they are implemented.
China and South Korea are among 12 countries being threatened with 53% import tariffs by the US in an effort to protect its domestic steel industry, while Japan is susceptible to a global tariff of 24%.
Those countries’ export volumes to the US could be restricted to 63% of 2017’s volumes, resulting in the availability of surplus materials which would need to find sales outlets elsewhere in the global markets.
China exported 1.18 million tonnes of finished steel to the US in 2017, broadly similar to 1.17 million tonnes in 2016, according to data from China Customs. The East Asian country’s export markets were not expected to suffer directly from high US import tariffs, if they are implemented, because only 1.57% of China’s total export volumes went to the US in 2017.
However, the indirect effects of the tariffs will have a far larger effect if other countries reduce their demand for China-origin steel substrate with which to make their own exports.
For example, South Korea was the single largest importer of Chinese steel in 2017, taking in 11.4 million tonnes.
“High tariffs on South Korean products will lead to lower consumption of China-origin steel, because South Korean mills process Chinese substrate into finished products before exporting them to other countries, including the US,” a trader in eastern China said.
US President Donald Trump has until April 11 to announce his final decision about trading sanctions.
“Regardless of the final decision,” a trader with detailed knowledge of the Asian flat steel markets said, “it is likely that trade flows in Asia will see some changes.”