FOCUS: China emerges as savior for steel amid weak global economy

China has become the savior of the global steel market, with its big appetite and high domestic prices supporting the international ferrous supply chain amid the Covid-19 pandemic.

While demand for steel in most economies has plummeted in the face of the health crisis, that in China has been strengthening since at least the second quarter of 2020 amid the country’s steady recovery after battling the initial outbreak of the coronavirus.

Domestic prices for Chinese steel products have been trending upward in recent months. Some of them have even risen to their highest so far this year, which opens the window for arbitrage opportunities. This has kept interest for imports high.

Compounding this is a plan by local authorities in Hebei province, the country largest steelmaking region, to reduce capacity to no more than 200 million tonnes per year by the end of 2020 and consolidate the local steel industry further through mergers and consolidated business structures in Tangshan and Handan, which will result in more electric-arc furnaces (EAFs) and bigger blast furnaces being set up.

Hot-rolled coil
China has imported large quantities of hot-rolled coil from India, South Korea, Japan, Taiwan and Russia this year, with traders taking advantage of the arbitrage.

Meanwhile, prices for Chinese HRC have continued to rise.

Export prices for the flat steel product has risen rapidly to $475.32 per tonne fob China on July 22 from a year-to-date low of $401.38 per tonne fob China on April 17.

Domestic HRC prices in eastern China have also increased to 3,950-3,970 yuan ($565-568) per tonne on July 22 from 3,150-3,190 yuan per tonne on April 2, when prices fell to their lowest so far this year.

While cargoes from India had made up a sizeable proportion of China’s imports earlier this year, escalated tensions between the two countries as a result of a border spat have led to Chinese buyers turning their attention toward Vietnam in recent weeks.

Sources said China has imported at least 100,000 tonnes of HRC from Vietnam’s Formosa Ha Tinh Steel Corp in June and July, although this could not be confirmed with the latter.

Flat steel prices are expected to continue to rise in the near term. Market sources are expecting Formosa Ha Tinh’s offers in August – for materials to be shipped and delivered in October – to increase further from those made in July.

China’s insatiable demand for semi-finished steel in the face of reduced blast furnace operating rates and government-imposed emission controls has also supported prices for billet.

A shortfall in Chinese billet output benefited suppliers in Oman, Vietnam and Turkey in the past few months.

Chinese buyers were willing to pay increasingly higher prices for imports of the semi-finished product against the backdrop of a strengthening domestic market. Domestic billet prices in China rose to an intra-year high of 3,420 yuan per tonne on July 22 from an intra-year low of 3,000 yuan per tonne in February and April.

In the past few weeks, import transactions have included at least 150,000 tonnes from Vietnam, 30,000 tonnes from Oman and various other quantities from Indonesia. The latest transaction was heard to have been concluded this week at $430 per tonne cfr China, up by $7-17 per tonne from $413-423 per tonne cfr China previously.

The cancellation of contracts to supply domestic buyers with some 200,000 tonnes of billet by Chinese traders has also resulted in stronger demand for imports.

Ferrous scrap
China’s appetite for billet imports have in turn supported global ferrous scrap prices, with major scrap buyers Turkey and Vietnam purchasing large quantities of the steelmaking raw material to churn out the semi-finished product to ship to the world’s second-largest economy.

Buyers in Vietnam are paying increasingly higher prices for Japanese H2 scrap. Offers for Japanese H2 were made at $260-270 per tonne cfr southern Vietnam this week, up by $10-15 per tonne from $250-255 per tonne cfr southern Vietnam in the previous week.

Scrap importers in Taiwan have also had to pay higher prices for the steelmaking raw material. Fastmarkets’ daily price assessment for steel scrap HMS 1&2 ((80:20)) US material import, cfr main port Taiwan was $240-242 per tonne on July 22, up by $5-7 per tonne from $235 per tonne on July 14.

Scrapyards in Japan and the United States are riding the bullish wave. They have raised their export prices significantly in the past weeks.

Prices for Japanese scrap, in particular, have benefited from strong demand in Asia.

Fastmarkets’ weekly price assessment for steel scrap H2 export, fob main port Japan was ¥24,500-25,000 ($229-234) per tonne fob on July 22, up by ¥5,500 per tonne from a low of ¥19,000-19,500 per tonne fob on April 8.

Pig iron
China has been an active importer of pig iron this year, continually purchasing large quantities from Brazil and Russia. At least three cargoes have been booked so far this month.

Chinese demand for metallics has also supported prices of complementary products such as ferrous scrap and iron ore, with steelmakers around the world looking to purchase these materials to feed their furnaces.

The worst floods in China in 20 years have also not dampened demand for steel and steelmaking raw materials. Market sources are expecting post-flood reconstruction efforts to bolster steel demand further.

Iron ore
Major iron ore miners are banking on Chinese demand to increase their shipment volumes, especially amid a drop in Brazilian supply due to operational disruptions related to Covid-19 in South America.

BHP’s iron ore output rose by 4% year on year to 242-253 million tonnes in its financial year ended June 30. Its April-June shipments increased by 11% quarter on quarter, according to its latest production report.

Rio Tinto said output from its Pilbara operations increased by 4% year on year and 7% quarter on quarter, with port operations achieving a record week of shipping in early June, it said in its second-quarter production report. It attributed this mainly to steady Chinese demand for iron ore.

Brazil’s Vale said earlier this week that it was expecting to realize the lower end of its 310-330 million tonnes production guidance.

Meanwhile, Anglo American has lowered its 2020 production guidance for its Kumba iron ore operations in South Africa to 37-39 million tonnes from 41.5-42.5 million tonnes previously. It maintained that for its Minas Rio operations in South America at 22-24 million tonnes, though it warned that its outlook was subject to developments surrounding the Covid-19 pandemic.