FOCUS: China’s steel exporters grappling with defaults abroad

Defaults among overseas buyers have become a problem for Chinese steel exporters in recent weeks, with falling prices and weakening demand triggered by the Covid-19 pandemic leading to an increase in export credit insurance claims.

When contacted by Fastmarkets two weeks’ ago, a source at a steel mill in northern China said he was having to deal with a shipment of 5,000 tonnes of hot-dipped galvanized coil that had been cancelled by a South American buyer that had booked it earlier in the year.

This week, a source at a mill in eastern China said it had encountered similar problems involving 10,000 tonnes of steel products, “with buyers using excuses of lockdowns or breakdown in cashflows.”

And a source at a second eastern China-based mill said a report by his company shows a 56.9% year-on-year increase in March in export credit insurance claims, most of which were related to the pandemic. Export credit insurance covers the risk of non-payment by foreign buyers.

China’s Ministry of Commerce conducted a survey soon after the emergence of the Covid-19 outbreak, which found that more than 90% of more than 7,000 export companies had encountered problems with shipping or delayed payments since the start of the pandemic.

“Lockdowns are a problem in case we cannot send cargoes ashore, while continuous drops in the price of steel have made things worse... buyers are bearish about the economic outlook for the coming months,” the second mill source said.

Logistics breakdown
Cancellations were first reported in Pakistan, which ordered a lockdown late in March.

A Tianjin-based trader said a cargo of hot-dipped galvanized coils had been shipped to Pakistan at that time “but when the cargo reached Pakistan the ship had difficulty discharging the cargo.”

The exporter did not receive payment in time because banks will not transfer money until buyers confirm that they have received the orders “and I’m not sure whether such problems have yet been resolved,” he said.

“What’s worse… the shipping costs [have increased] due to the demurrage and perhaps the exporter has to cover that,” he added.

For most of China’s steel exports, buyers typically pay deposits to banks for letters of credit. Based on these, exporters prepare the cargoes and arrange for shipping.

“Theoretically, banks have to pay in full no longer than five days after exporters have shipped the goods, and buyers are forbidden from withdrawing orders once banks have issued the letter of credit,” the trader said. “But in reality, there are many cases where the flow could break – such as when logistics break down.”

Cashflow breaks
Unlike the force majeure in Pakistan, which could not be predicted, “buyers in other regions will inform sellers earlier that they are meeting breakdowns in cashflow,” a Shanghai-based trader said.

“To some extent that is better because it helps to save costs,” the first mill source said. “At least we don’t need to produce the steel ordered. I really feel sorry for those who had their cargoes cancelled after the goods were produced and shipped.”

Most of the recent cancellations happened in Indonesia and South America, both of which are major importers of China’s hot-dipped galvanized coil, with Indonesia procuring much of its coated coil from the town of Boxing in Shandong province, eastern China.

“I heard that many coated coil sellers in Boxing had lost deals in Indonesia in recent days,” the Shanghai-based trader said. “They said their customers had explained they could not pay in time after their cashflows were disrupted due to the pandemic. Such buyers have also lost many downstream orders, which has forced them to cancel contracts for raw materials.”

Domestic output rising for now but decline expected

The second mill source claimed to have heard that a mill in northern China had around 60,000 tonnes of HRC and HDG cancelled, while his own mill had 10,000 tonnes cancelled.

“We then had to sell these cargoes to the domestic market,” he said. “If such goods are already produced, sellers need to find domestic buyers [and to] shift raw materials towards domestic production, which partly explains why domestic output gained even when prices dropped.”

HRC output in the week to Thursday April 9 was up 135,800 tonnes from the previous week at 3.1 million tonnes, a steel consultancy in China reported.

“But that’s not sustainable,” the mill source said. “In the longer term, we will cut HRC output as a whole, amid dropping prices and shrinking profits.”

The source said his company will shut one of its three HRC production lines, while a source in Tangshan, the steelmaking hub of China, said it had already switched one third of its HRC capacity to long steel production.

Default amid price drops
A Beijing-based trader said in mid-March that overseas customers were cancelling HRC orders booked around the Chinese New Year at $460-470 per tonne fob China. This is continuing, he added, with buyers now cancelling goods booked at $420-425 per tonne fob.

These figures echo Fastmarkets’ assessment, with the price even lower now, having fallen to $400-410 per tonne fob over the past week.

“I believe cancellations will continue as long as prices continue to fall,” the trader said. “Although reasons are complicated, price drops set the foundations for the continuous defaults - otherwise buyers would rush to restock even if shipping and logistics are difficult amid the spread of the pandemic because everyone wants to buy when prices gain.”

Alongside HRC, buyers also defaulted on several HDG and coated coil deals, with these flat products accounting for the majority of China’s steel exports, a second Shanghai-based trader said.

Flat steel accounted for 58% of China’s steel exports in 2018, a proportion that should have grown in 2019 and 2020 with China’s long steel prices growing faster, according to a domestic industrial consultancy.

Temporary import growth
While overseas buyers have defaulted on Chinese exports of HRC and HDG, China imported significant quantities of HRC and slab.

A third Shanghai-based trader said a South Korean mill sold around 100,000 tonnes of June-shipment HRC to China at $385 per tonne cfr China in the week to Friday April 10, equivalent to 3,150 yuan per tonne in the domestic market. HRC was sold in the east at 3,200-3,300 yuan per tonne.

In March, a mill in Jiangsu province reportedly agreed to import 20,000-50,000 tonnes of May- and June-delivery slab from Russia, mainly at $345-370 per tonne cfr China. The low end of the range is equivalent to around 2,900 yuan per tonne in the domestic market.

This means the steel mill will be able to produce HRC and plate at around 3,200 yuan per tonne. HRC in east China was trading at around 3,300 yuan per tonne while plate was at 3,600-3,670 yuan per tonne in March.

“All this suggests that prices in China have been higher than those in other countries,” the Beijing-based trader said. “So it is understandable that buyers overseas want to cancel Chinese goods. Not only because China prices dropped but also because they were able to access cargoes from other countries.”

But the import trend is likely to be a short-term phenomenon given that major overseas producers have planned to cut output. Thereafter, they are likely to raise offers once they get rid of excess supplies, market participants said.

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